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When getting a mortgage in Milwaukee, you are to be charged two different rates, the annual percentage rate (APR) and the interest rate.
Being able to understand the difference between the two rates is highly important and will help you to make an informed decision when searching for an appropriate lender and the best suitable loan for you.
Keep in mind that your APR is not the same as your interest rate, and can sometimes include any discount points that you may have paid in order to reduce your actual interest rate that you will be paying. Think of APR as the cost of borrowing.
Understanding What Impacts APR vs Note Rate in Milwaukee
There is a difference between APR and actual note rates and this is pretty confusing, especially for First-Time Home Buyers in Milwaukee who have not experienced the whole entire closing process yet.
When you are shopping for a new mortgage loan in Milwaukee, you might notice an Annual Percentage Rate (APR) that is promoted next to the note rate.
The APR inclusion is mandated by federal law to be able to assist Milwaukee borrowers in giving them a standard rule of measurement in comparison with each loan’s total cost.
The APR is a representation of the “true cost of a loan” to a home buyer in Milwaukee, in the expression of a form pertaining to a yearly rate that prevent lenders from being able to hide fees and up-front costs behind low advertised rates.
According to Wikipedia:
The terms annual percentage of rate (APR) and nominal APR describe in interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate.
The nominal APR is the simple-interest rate (for a year).
The effective APR is the fee + compound interest rate (calculated across a year)
The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year. However, the exact legal definition of “effective APR” can vary greatly, depending on the type of fees included, such as participating fees, loan origination fees, monthly service charges,or late fees.
The effective APR has been called the “mathematically-true” interest rate for each year. The computation for the effective APR, as the fee + compound interest rate, can also vary depending on whether the up-front fees , such as origination or participating fees, are added to the entire amount, or treated as a short-term loan due in the first payment.
What Fees Are Typically Included In APR?
- Origination Fee
- Discount Fee
- Buy down funds from the buyer
- Prepaid Mortgage Interest
- Mortgage Insurance Premiums
- Other lender fees (applications, underwriting, tax service, etc.)
Because of origination fees, discount points, mortgage insurance premiums, prepaid interest and other items might be required to obtain a mortgage, they will need to be included as well when calculating the APR. However, fees such as title insurance, appraisal and credit are not included in the calculation of the APR.
There are multiple variations of the APR between lenders and programs because the federal law does not distinctly define exactly what goes into the calculation.
What Are Points?
Points are a percentage of a particular loan amount that is paid at closing that can have an effect on your interest rate.
For example, on a $90,000 loan, 1 point would equal to 1% which in dollar amount would be $900. So by paying the points, you are buying down the rate.
In reciprocal, for a higher rate, the lender pays the points in order to offset your closing costs, which are called negative points. Negative points can be a good option if you are limited in funds for your closing time. Points are also considered as discount points. Regardless of what you may call it, they are usually paid at closing of a loan.
What Does APR Not Disclose?
- The anticipated changes an Adjustable Rate Mortgage will incur.
- Balloon Payments
- Prepayment Penalties
- Length of Rate Lock
- Comparison between loan terms – e.g. : A 15-year term will come with a higher APR mainly because the fees are amortized over a shorter period of time in comparison to a similar rate/cost scenario on a 30-year term.
APR Comparing Examples:
Bank (A) is offering a 30 year fixed mortgage at 8.00% APR
Bank (B) is offering a 30 year fixed mortgage at 7.00% Note Rate
Easy decision, right?
Even though Bank (B) is promoting the lowest Note Rate, they are not including the origination points, underwriting/process fees and prepaid mortgage interest (first month’s mortgage payment), this can essentially create a much higher APR than Bank (A) is advertising.
Now, Bank (A) may be showing a higher rate because of the APR, in the meanwhile they could in reality be charging a lot less in total fees than Bank (B).
Lenders and mortgage professionals were not required before to state the APR, it was more intricate to find the truth in regards to the total borrowing costs of one loan as opposed to another. When taking mortgage rates into comparison with another, it is a good idea to ask your lender which fees are included in their APR quote.