Decide How Much You Can Afford
Compare Loans
Using the APR (annual percentage rate)
The APR is a number specifically designed to allow you to compare similar loans (e.g., fixed to fixed, ARM to ARM) from the same or different lenders without analyzing fee and rate information. Although the calculation itself is complicated, making the comparison is quite simple.
Take a look at this example:
Assume that you're comparing two, fixed rate 30-year mortgages for $100,000 with different interest rates and different amounts of lender fees:
| Loan #1 | Loan #2 |
| Interest Rate | |
| 6.00% | 6.25% |
| Prepaid Finance Charges* | |
| $3,000 | $2,500 |
| APR | |
| 6.29% | 6.49% |
* Prepaid finance charges include a variety of costs to close the loan such as lender fees, broker fees, interim interest, and escrow fees.
In this example, you only need the APR to determine that Loan #1 is the most cost effective loan offered. When comparing loans and lenders, your mortgage professional should provide you the APR on any loan discussed.
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Calculators
Calculators are available to help you compare and provide you with different scenarios that best fit your needs.
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Questions to Ask Your Lender
When shopping for a loan:
- What is your best interest rate today? What is the total of all fees including the lender fees, third-party fees and transaction fees?
- Is this rate fixed or adjustable? (A fixed interest rate stays the same for the life of the loan while an adjustable rate changes.)
- Ask if the loan carries a rebate or yield spread premium, and whether you will receive the benefits.
- Is there an application deposit? If so, how much is refundable?
- What is the total monthly payment including taxes, homeowners, and mortgage insurance?
When you apply for your loan:
- Do you charge overages?
- If I lock in my interest rate today, what is the best rate available? What are the fees?
- How long is the lock guaranteed?
- What is the annual percentage rate (APR)?
- Is there a balloon payment due on the loan?
- Are there any pre-payment penalties? What are they and how many years are they in effect?
- Does the interest rate increase if my payments are late?
- Did your lender give you a Good Faith Estimate (GFE) and a copy of the federal booklet on settlement costs? Insist that you get a copy of this document within 3 days of your loan application.
If the loan is an Adjustable Rate Mortgage(ARM):
- What is the initial rate? How long will that rate stay in effect?
- How often can the rate change?
- What are the rate and payment caps each year, and over the life of the loan?
- Can I convert my adjustable rate loan to a fixed rate without doing a new loan?
- Is there a prepayment penalty? If so, how long does it apply?
