Investing in a House? Fully understand Your Annual Percentage Rate

Most people don't think too much about their Annual Percentage Rate (APR) because the most important thing in their mind is the monthly payment on their home. But the APR on your home mortgage loan is an important thing to know because it gives you a way to compare the real costs on different loans, something you need to consider when obtaining your original financing as well as refinancing.

Mortgage loans can be confusing, especially when there is a lot of complicated paperwork involved. The US Government passed the Truth in Lending Act to help consumers understand what they are signing, and how much interest and other costs they are going to pay when they borrow money.

The APR reveals the actual cost of a loan in terms of a percentage. If your loan has a 7% rate, you'll pay $7 on each $100 you borrow per year. That is an important number to understand. Because that $7 is interest on the loan, it does not go towards repayment of the loan at all. It is extra. So, if you borrow $100,000 to purchase a home and the interest rate is 7%, you will be paying $7000 during the first year just for the privilege of borrowing money. As the balance of the loan decreases each year, you will be paying 7% of the reduced balance, year after year as interest.

However, APR may include more than just the interest on the loan. On a mortgage loan, APR may also include Private Mortgage Insurance, processing fees, and discount points. There are often other fees and charges as well, sometimes they are included in the stated APR and sometimes they are not. Therefore, you need to look closely at each and every cost associated with obtaining a mortgage loan, and determine your actual APR based on all the costs. The truth is, you can't depend solely on an APR quotation to judge a loan. You should examine each and every fee and expenditure item on the documents for the loan to be able to assess your entire expenses.

Take your time and have your real estate agent, your loan officer and your lawyer help you understand what you are reading and signing. Taking your time to read and understand exactly how much you will be paying for the money to buy your home, as well as the home itself is the best way to make certain you are getting the best deal in the long run.


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