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Home loans and APR (Annual percentage Rate).
Annual Percentage Rate (APR) is used to compare home loans.
It is a somewhat artificial rate that was designed to compare
the true cost of home loans.
Different banks calculate APR in different ways, so that comparing
the APRs of two loans does not necessarily show which home loan
is cheaper.
Lenders use the following in calculating APR:
- points of a home loan.
- the interest paid between the loan closing date and the end
of the month.
- home loan processing fee and underwriting fees.
- document preparation fee.
- home loan private mortgage
insurance.
Some banks also include home loan application fees and credit
life insurance, which pays the home loan off in the event of
your death.
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Comparing home loans.
In order to truly compare two home loans, it is necessary to
exclude all the independent loan fees, whatever they might be,
and then do the comparison. Interestingly enough, even loan brokers
are sometimes confused about APR number, what loan fees are included
in it, and which fees are independent of the home
loan.
APRs of adjustable loans and home loans ending with a
balloon payment are nearly impossible to compare, since
the interest rates in the future will change.
Adjustable and fixed rate loans.
Adjustable interest rate home loans are usually for 30 years.
The interest rate is a function of adding the index and a margin.
The index is the part that changes due to the economic conditions,
and the margin is a constant number. Adjustments can take place
monthly, every six months, or annually.
Fixed interest rate home loans are given for 15, 30 and
sometimes 20 years, and both the payment and the rate
remains the same for the whole life of the loan.
Some home loans are first fixed for a number of years, typically
3, 5, or 7, and then become adjustable rate home loans.
See also: home
buyer mistakes, home
refinancing, home
equity, home
and taxes,
refinancing tips, home
insurance
Related topics: VA
loans, mortgage
glossary, Freddie
Mac's home buying
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