If you are new to buying a house, borrowing or have made some mistakes when in the financial market, you might consider learning the lending terms. You hear the words interest rates and APRs and usually your first instinct is to nod you head and think, "whatever", because ultimately you need the money. However, interest rates and APRs have a major impact on the loans we take out and can also affect our ability to pay back our obligations. Therefore, if you are considering working with a creditor, read up about the details of interest rates and APRs so you can be an educated borrower.
For many people, we assume that interest rates and APRs are the same thing, because both of them charge us money. Yet, on the contrary, interest rates and APRs are quite different and they will definitely impact the loan you take out and even your ability to pay it back. For this reason, it is imperative to understand the difference between to two so you know what you are getting yourself into.
Interest is something that most people seem to understand because it is a lot less complicated than APRs. Basically, it is the fee we incur because we decided borrow money, and it is determined based off the amount of principal for the loan and the term of the loan. Although interest is mainly determined off the principle and term, there are other details that could affect your interest rate.
One of the biggest factors that affect the interest rate is the type of loan you take out with the bank - fixed loan, ARM loan, etc. In addition, your interest rate can also vary depending on the amount of your loan versus the value of your home. Also, many times interest is evaluated based off the type of property you decide to purchase. Depending on whether you are purchasing a home for a primary residence, secondary residence, or investment property, the interest rate can vary.
One of the greatest things about a mortgage is the opportunity to buy down your interest rate by paying more up front. When you buy down you receive a point for 1 percent of your total principle that you pay up front. For example, you could buy down 5 points in interest if you paid $5,000 up front for a $100,000. Buying down interest rates are not only a great way to lower the interest rates, but they also save you money and can possibly allow for tax benefits.
If you do not know how to calculate interest, it is actually quite simple. You divide the total amount of interest charged from the loan by the total amount of the loan; therefore, if your lender loans you $10,000 and charges you $100 in interest your interest rate is (100/10000) x 100 percent = 10 percent. Computing interest rates always simple, even if the numbers are a little bit more complicated.
Besides the interest rate, APR (annual percentage rate) is also discussed frequently when it comes to lending. The APR is calculated annually and it includes the total closing costs and interests over the entire term of the loan; therefore, many believe that it is a better indicator of the expected costs of the loan. When you look APR, you tend to overlook costs that may come up in the future.
Because the APR takes into consideration all of the costs, not just the interest rate, it is usually higher than the interest rate. Also, the calculation for APR is not as simple as calculating interest, because it involves an amortization schedule and a more complex equation. For this reason, the APR is often a better prediction about your future charges from the loan.
When you apply for your mortgage loan both rates, the interest rate and the APR are involved. The actual rate will depend on the market conditions at the given time and your credit history. Regardless of the changing rates, understanding the two terms will help you to more effectively choose the right mortgage.
While interest rates and APRs are definitely based on the market, the controlling costs that come with a new mortgage are definitely something that you have control over. These items are the prepaid items such as the closing costs and mortgage insurance. Work with your lender to negotiate these items, especially given that you have more flexibility with them.
Also, because you are more informed about lending, you should shop around. You might be tempted to go with the first person that offers you a loan, however it might not be the best decision. Research and find the best choice for you. - 2364
For many people, we assume that interest rates and APRs are the same thing, because both of them charge us money. Yet, on the contrary, interest rates and APRs are quite different and they will definitely impact the loan you take out and even your ability to pay it back. For this reason, it is imperative to understand the difference between to two so you know what you are getting yourself into.
Interest is something that most people seem to understand because it is a lot less complicated than APRs. Basically, it is the fee we incur because we decided borrow money, and it is determined based off the amount of principal for the loan and the term of the loan. Although interest is mainly determined off the principle and term, there are other details that could affect your interest rate.
One of the biggest factors that affect the interest rate is the type of loan you take out with the bank - fixed loan, ARM loan, etc. In addition, your interest rate can also vary depending on the amount of your loan versus the value of your home. Also, many times interest is evaluated based off the type of property you decide to purchase. Depending on whether you are purchasing a home for a primary residence, secondary residence, or investment property, the interest rate can vary.
One of the greatest things about a mortgage is the opportunity to buy down your interest rate by paying more up front. When you buy down you receive a point for 1 percent of your total principle that you pay up front. For example, you could buy down 5 points in interest if you paid $5,000 up front for a $100,000. Buying down interest rates are not only a great way to lower the interest rates, but they also save you money and can possibly allow for tax benefits.
If you do not know how to calculate interest, it is actually quite simple. You divide the total amount of interest charged from the loan by the total amount of the loan; therefore, if your lender loans you $10,000 and charges you $100 in interest your interest rate is (100/10000) x 100 percent = 10 percent. Computing interest rates always simple, even if the numbers are a little bit more complicated.
Besides the interest rate, APR (annual percentage rate) is also discussed frequently when it comes to lending. The APR is calculated annually and it includes the total closing costs and interests over the entire term of the loan; therefore, many believe that it is a better indicator of the expected costs of the loan. When you look APR, you tend to overlook costs that may come up in the future.
Because the APR takes into consideration all of the costs, not just the interest rate, it is usually higher than the interest rate. Also, the calculation for APR is not as simple as calculating interest, because it involves an amortization schedule and a more complex equation. For this reason, the APR is often a better prediction about your future charges from the loan.
When you apply for your mortgage loan both rates, the interest rate and the APR are involved. The actual rate will depend on the market conditions at the given time and your credit history. Regardless of the changing rates, understanding the two terms will help you to more effectively choose the right mortgage.
While interest rates and APRs are definitely based on the market, the controlling costs that come with a new mortgage are definitely something that you have control over. These items are the prepaid items such as the closing costs and mortgage insurance. Work with your lender to negotiate these items, especially given that you have more flexibility with them.
Also, because you are more informed about lending, you should shop around. You might be tempted to go with the first person that offers you a loan, however it might not be the best decision. Research and find the best choice for you. - 2364
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