HOW INTEREST RATE, APR, AND POINTS ARE CALCULATED?


Even after doing their research before getting a mortgage, many people often find it hard to compare the loan terms and the points to get a lower interest rate. Here, we are going to try and shed some light on the how these three work.


The Interest Rate

The interest rate of a loan is the amount of money you pay to the mortgage lender annually. It is the most obvious difference between mortgage loans. They also happen to be the most important one since even a slight difference can add up or reduce your monthly payments in the long run. You can find out the interest rate of your home by checking out the mortgage rate tables of your area online. Since interest rates can be somewhat unpredictable, you can also use online calculators to find out the interest rate.


Points

Points will comprise of the largest part of what has to be paid up front to the mortgage lender. Points are considered as prepaid interest which can lower the overall interest rate. Since one point is 1% of the loan principal, if you borrow $250,000 at 2 points, you will have to pay $5,000. Usually, there is a direct relationship between the interest rate the mortgage lenders quote and the number of points they charge. But, before you begin to compare the points to interest rates, you will need to factor in how long you plan on owning your home.


APR

A way of comparing loans which have different points is to use an APR. The APR calculates the cost of a loan as an annual rate. While this can be misleading at times, since most loans tenures are for 30 years, borrowers usually pay the loan off before the term ends. It is also important to note that different mortgage lenders calculate the costs that are included in the APR differently. It’s not unheard of for the same amount and points to have different APRs according to different mortgage lenders


For more information or questions about mortgage,
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