Friday, January 6, 2012

Mortgage Broker Bill Rayman: What is APR and how does it effect me?

Very simple question, very simple direct answer.  APR stands for Annual Percentage Rate.  So what is APR, what does it mean, and why is it different than the note rate?  The note rate is the actual rate that you will pay on your loan.  APR is a mathematical formula that is meant to even the playing field.  If you go to six brokers (from my point of view, I hope you don’t) the first broker might say “Well, I can get you this rate if you pay three points and $500.”  The second broker might say “I’ll get you this rate, but you pay one point and $4000” and yet another broker might say “I’ll give you this rate, no point, no cost.”  Now you’re going to be at a loss trying to figure out which really is the best deal for you. The best deal isn’t necessarily the lowest rate, and it isn’t necessarily the lowest APR.  For instance, if you don’t have a lot of cash you might choose a rate which is higher, because you are not obligated to bring the cash in.  So there’s always going to be personal choices.  

What APR does: it’s a way of computing the cost of doing the transaction, the escrow fees, all the things you need to have to do a loan, and it adds them to the loan amount (so you’re technically borrowing more than the loan amount) and when you do the math, you get a slightly different interest rate than the actual note rate.  So let’s say your note rate is 5%.  By the time you add up these other costs and add them in, your APR might be 5.13%.  So now if you look at those six brokers, forget what their offers are because those points they’re charging get added to the costs or if they’re not charging any points and fees, there’s nothing to add in but they’re probably at a higher interest rate.  The net result is that you’ll have an APR from each broker, and you can see who’s the most expensive versus who’s the least expensive.  

Just because one’s the least expensive doesn’t mean that’s the best choice.  If it turns out the least expensive rate is the one you have to pay the most cash to get that rate, or if your circumstances are as such that you’d rather not lay out another $10,000 or $15,000, then maybe for you the right choice is such that the APR is a little bit higher.  I’m saving my cash.  The APR has nothing to do with what your actual monthly payment is.  That’s going to be the rate on your note to which you’re locking in with your broker and negotiating with the borrower.

1 comment:

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