What is the difference between APR and interest rate?
It is important to understand the difference between your interest rate and APR.
Your interest rate is the direct charge for borrowing money.
The APR, however, reflects the cost of your mortgage as a yearly rate and includes the interest rate, origination charge, discount points, and other costs such as lender fees, processing costs, documentation fees, prepaid mortgage interest and upfront and monthly mortgage insurance premium. When comparing loans across different lenders, it is best to use the quoted APRs for the same type and term of loan.
What are points and when should I pay them?
Paying points is a way to reduce your interest rate when you purchase or refinance your home. In essence, you pay up-front for a lower interest rate, reducing your monthly payments. One point is equivalent to 1% of your loan amount; one point on a $100,000 loan amount is equal to $1,000.
How can I compare loan offers when shopping for a mortgage?
If you are comparing loans across lenders, be sure to look at all costs, not just the interest rate. The annual percentage rate (APR) tells you the estimated cost of your loan, which includes the interest rate and other upfront fees that you pay for the loan (such as discount points and origination fees). The APR is based on the assumption that you'll keep the loan for its entire term, so you should only use it to compare loans of the same type and length.
What is an index and how does it impact my rate?
An index is a published rate used by lenders to calculate interest adjustments on ARMs (Index + Margin = Interest Rate). Some indexes may adjust more frequently than others. Common indexes used are LIBOR (London Interbank Offered Rate), Treasury rates, and the prime rate.
What are closing costs?
Closing costs are fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during a mortgage closing. These typically include a loan origination fee, discount points, attorney's fees, title insurance, appraisal, survey and any items that must be prepaid, such as taxes and insurance escrow payments. Your lender will give you a copy of your GFE (Good Faith Estimate) that outlines all the closing costs associated with your loan soon after you apply.
What are third-party fees?
Third-party fees are costs associated with your mortgage that go to a third-party for services. Lenders typically have no control over most of these fees. Third-party fees include, but are not limited to, credit report fees, hazard insurance, appraisal fees and title company search fees.
What is an origination fee?
An origination fee is a fee a lender charges to process a mortgage, usually expressed as a percentage of the loan which pays for the work in evaluating and processing the loan.
What is prepaid interest?
Prepaid interest is a cost charged to a borrower at closing to cover interest on the loan for the extra days in addition to a full month before the first payment is due.