What does my APR have to do with my RATE and CLOSING COSTS and why I should care?
Judy went under contract on her new house today! Her Realtor told her to talk to their “in-house lender” who quoted Judy a 4.125% rate with an APR of 4.4%. Judy also called her bank and was quoted 4.125% rate with an APR of 4.3%. Judy had done her homework and knew that the APR (annual percentage rate) was a calculation that included the 4.125% rate and the extra upfront fees she would pay to get that rate. Judy knew that given the same rate of 4.125%, the bank loan with the 4.3% APR would save her money.
When Judy was driving over to the bank to meet with her loan officer she had a flat tire. As luck would have it a mortgage broker stopped to help her change her tire. Judy asked the mortgage broker what his rate was, and he said it was 4.125% with an APR of 4.3%. Judy said, “That is the same deal my bank gave me, so I am going to go ahead and meet with them.” The mortgage broker said, “HOLD ON, how much of a closing cost credit are you getting from the bank?” Judy said, “I don’t know what a closing cost credit is but I do have the bank rate quote in my car. Can we go over it?” The bank rate quote did not have any closing cost credit for her. The broker told her that that at the same rate she would also get a closing cost credit of $1,500 that would be applied to her closing costs.
Judy decided to take the deal with the $1,500 credit, and bought her boyfriend a new GIANT TV…just kidding, but she did take a vacation to the Bahamas!
How to avoid this costly mistakes?
The US gov’t requires that mortgage lenders disclose the rate and the APR, or annual percentage rate. The APR is higher than the rate, because it figures in upfront fees you are paying to get that rate. It is important when comparing quotes to look at the rate and the lender charges to get that rate. These charges include upfront fees like an origination fee, discount points, application fees, and commitment fees.
Do not compare offers by looking at third party fees like attorney, title insurance, homeowner’s insurance, and property tax escrows because those fees are not controlled by the lender. So look at the rate, lender fees, closing cost credit, and APR to decide which way to go.
One more thing!!!
Be sure to ask the mortgage broker or bank if there is a closing cost credit you will receive for a given rate. This can get tricky, because if you are working directly with a bank and they are offering a closing cost credit, it will be reflected in the APR. However, if you are working with a mortgage broker, the closing cost credit does not reduce the APR. So the bank and the mortgage broker could be offering the same rate, the same commitment fee, and be showing exactly the same APR, but the mortgage broker could have an additional $1,500 closing credit and the best deal for you.
Call us at 919-869-8210, if you have any questions or if we can help.
|Borrower||Interest Rate||APR- Annual percentage rate||*Up-front APR Fees Paid||Less Closing Cost Credit||Net Fees Paid at closing|
Above table is on a $200,000 loan amount
“Borrower 2” saves $1,500 in closing costs
*APR fees include origination, commitment, application, tax service, and flood certification fees.