HOW MUCH? - home loan

Comparing and choosing home loans.

   
 

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.

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.

Loan APR
© iStockphoto.com - nsilcock

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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