Is there a difference between APR & Points? The short answer is, “Yes. An APR & Points on a mortgage are two very different things.
(Part 5 of our Mortgage Basics series)
Before we jump into discussing APR & Points, you should know when shopping for a mortgage an interest rate is not the same as an APR, or Annual Percentage Rate.
An interest rate is what the lender charges you to borrow money. However, an APR includes not only the interest rate but also other fees that will be included in the life of the loan. For example, things that would be included are closing costs and loan fees. The annual percentage rate shows your total annual cost of borrowing.
Many homebuyers incorrectly refer to an “interest rate” as the “annual percentage rate“, or vice-versa. The fact is that most lenders typically use APR when reviewing and quoting the financing or loan so that the consumer knows the total annual cost of borrowing the money.
When comparing loans, it is always important to look at the quoted APRs and not just the interest rates. Also, by federal law, all lenders have to follow the same rules when calculating an APR. This ensures consistency and accuracy for consumers in the marketplace.
In a nutshell, when discussing mortgages, a point is a fee that helps reduce mortgage payments. One Point equals 1% of the amount financed.
Lenders lower the interest rate relative to the Points paid because you are essentially paying a portion of your loan upfront. For example, if you were financing $100,000 and paid 2 Points as part of your closing, you paid an additional $2,000 of the loan up-front.
As part of any negotiated real estate deal, Points can be paid by either the buyer, the seller or split between the two. This may depend on your local and state regulations, as well as requirements by your lender, so remember to ask if there are points attached to your loan, how much they are, and who will be paying for the point(s).
Paying a point or two points does not mean you will receive a reduction in the interest rate equal to the number of points paid. In other words, one point paid does not equate to an interest rate reduction of 1%. As a general rule of thumb, for budgeting purposes only, you may see that paying 1 point will reduce your 30-year fixed mortgage interest rate by 1/4 to 3/8.
An APR stands for Annual Percentage Rate and it includes the total annual cost of your loan, like closing costs and fees – It is a more comprehensive reflection of the total cost of the loan deal. An interest rate refers only to what the lender charges for the borrowed money. Comparing APRs and not interest rates are recommended.
Points can help reduce monthly payments and may or not be required as part of your financing deal. Deciding on whether or not to pay points will require you to consider how much on-hand money you have for the closing, plus how many years you expect to be living or owning the property.
Speaking with a trusted and experienced mortgage professional who will take the time to review different loan products with you, while understanding your financial position and future plans, is highly recommended.
If you read our previous “Mortgage Basics” articles, you are well on your way to having a strong basic understanding of the mortgage industry. If this is the first time visiting our blog and you want to dive into mortgage basics, start with our first article in the series titled, “Mortgage Basics – Part 1“. Links for each following article is provided at the bottom of each article.
The next article in the series discusses Pre-payment Penalties.
If you are in Connecticut or Massachusetts, and in the market for a new home, contact us and let’s review your options. As a mortgage broker, we have access to a wide range of mortgage products and can find one that works for your unique situation.
Use our Quick Quote form on our homepage or our Get Started form. Call us at (860) 285-0635 or email Mark or Samir (MHarrington@HorizonHomeMtg.com / SDoshi@HorizonHomeMtg.com), and we will connect you with any of our friendly, experienced team members.
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