Choosing between APR and interest rate on your next mortgage is a big decision. That said, it’s in your best interest not to let the intricacies of each detract from making the right choice. Only those that can differentiate between the concepts of annual percentage rate and interest rate that will be able to make well-informed decisions. And trust me, you don’t want to head into something as big as a mortgage without exercising every option available.
Choosing between APR and interest rate continues to confound those that are less than familiar with the concept, but I can assure you it’s worth understanding what you are getting into. At the very least, judging any future purchases off of an annual percentage rate (APR) or a standard interest rate can amount to a significant amount of money over the course of a loan, and therein lies the real reason you really need to consider choosing between APR and interest rate: the length you intend to hold onto a loan. Then, and only then, will the APR Vs. interest rate conversation move forward.
I maintain that time is of the utmost importance when determining whether your purchase should be based off of an annual percentage rate or a nominal interest rate. If for nothing else, it’s the duration of a loan and the way most are amortized that will dramatically impact how much it’ll end up costing the average borrower.
It makes more sense for those looking to live in a home for thirty years (or any extended period of time) to pay special considerations to the annual percentage rate interest. Since APR financing is a better barometer of how much things will cost, and more inclusive of other fees, it serves as a better indicator for what you can expect over the course of a long loan. That way, if you get a low APR interest rate, you can rest assured that you aren’t overpaying.
For some perspective on the matter, “December’s best offers for borrowers with the best profiles had an average APR of 3.80% for conforming 30-year fixed purchase loans, up from 3.75% in November,” according to LendingTree. So if you find yourself staring at an APR somewhere in the neighborhood of 3.80% for a 30-year fixed-rate loan in today’s marketplace, you may want to act sooner rather than later.
If, however, you are less inclined to hold onto a mortgage for thirty years and opt for a much shorter period, it could be in your best interest to pay fewer upfront fees. Not unlike the down payment for a home, paying less up front could result in a higher interest rate and monthly payment. However, the total cost could be less over the first few years. Simply put, you are paying more each month, but for a shorter period of time, which could work in a lot of people’s favor.
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When it comes to determining which APR and interest rate is good (relatively, of course), only one thing is for certain: the viability of annual percentage rates and interest rates are up for interpretation. What one prospective buyer may view as the deal of a lifetime, another may write off as a joke. That said, most professionals are of the belief that good mortgage rates share one undeniable indicator: Ideally, for a mortgage rate to be deemed good, it should be lower than the average. That way, the rate in question is better than the majority of others. But what’s average? Better yet, what’s better than average? How can you know if the APR or interest rate you are staying at is — in fact — good?
According to Bankrate, the “average 30-year fixed mortgage rate is 4.18%, up from 4.1% last week. 15-year fixed mortgage rates increased to 3.57% this week, from 3.49% last week.” While interest rates continue to creep up, as expected, they remain at historically low levels. Anything less than 4.18% for a 30-year fixed-rate mortgage should, therefore, be viewed as favorable. Likewise, those looking to go the 15-year route should appreciate anything less than 3.57%.
It is worth noting that rates are expected to rise over the course of 2018. If you want to purchase, you may have better luck acting sooner rather than later.
Annual percentage rates, on the other hand, require looking at things from a different perspective. According to LendingTree, the “best” borrowers — those least likely to default on a respective loan — were given access to an average APR of 3.80% for conforming 30-year fixed purchase loans as recently as December of 2017. That means the upper-echelon borrowers were given access to annual percentage rates below 4%, which anyone should be happy with in today’s market. The majority of borrowers, however, received an average annual percentage rate of 4.42% on conforming 30-year fixed-rate loans. Take your own credit history into account, and see where you fit in.
If you look closely, you will notice that the average APR and the average interest rate are slightly different. Perhaps even more importantly, you’ll notice that the average APR is slightly higher than the average interest rate; that’s because APRs tend to include additional fees and costs, whereas interest rates simply identify the cost of borrowing (without additional fees).
Choosing between APR and interest rate doesn’t need to be the difficult mess many inexperienced buyers make it out to be. In fact, all you have to do is ask yourself a couple of simple questions in order to maintain a better idea of what to look at the next time you go to acquire a mortgage. Specifically, those choosing between APR and interest rate indicators need to account for the length of they loan they intend to acquire. If you can identify a great APR over the course of a 30-year fixed-rate loan, you may want to jump at the opportunity. However, those looking for shorter loans may find better luck focusing on interest rates.