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Confusion Between APR and the Interest Rate I am Getting Quoted

Confusion Between APR and the Interest Rate I am Getting Quoted
April 1, 2013 wpengine

I am confused about the difference between APR and the interest rate I am getting quoted. Can you explain?

This is a question that has caused confusion to many people so you are not alone!  Here’s the scoop:

The interest rate you are being quoted on your mortgage is exactly that, the interest you will pay on the amount of the loan.  The amount of money that you will pay in interest will decrease over time, as the amount of the loan decreases.

Annual Percentage Rate (APR), on the other hand, can be unclear, and it can be manipulated.  APR will take into account not only the amount of the loan and the corresponding interest rate but will also include loan closing costs, fees, Private Mortgage Insurance (PMI), and any interest points you pay up front.  This will be expressed as a percentage you will pay over the life of the loan.

APR can sometimes appear as a lower rate than your interest rate, despite the fact that your closing costs, interest, insurance and other fees are included.  This happens most often with a variable rate mortgage, wherein the computer program used to calculate your APR, presumes that interest rates will decrease in the future.  This isn’t likely in most cases, so the APR is deceptive.

I advise my clients to pay attention first and foremost to the interest rate, the terms, the points and fees and any other closing costs, you are being offered to understand what you are actually paying.  As long as you have a clear understanding of exactly what you are paying in regards to those items, you will be able to determine which mortgage loan is best for you.

 

We are struggling a bit with our finances right now.  My husband and I are both retired and have lost a bit of money on our investments over the past few years.  We have a lot of equity in our home, so a friend suggested we downsize our home and get a reverse mortgage.  I’m not sure how that would help. Can you explain?

A reverse mortgage may be a great way to ease your financial strain. Let me give you an example:

Say your home is worth $600K, and you owe $300K. After you sell your home, pay all of the closing costs and fees, you find yourself with net a profit of $260K.  You have found a home or a condo that you like for $300K.  In this case, you could use $150K from your profit as a down payment, and obtain a reverse mortgage for the remaining $200K. You will never make a payment, but interest will accrue on the loan each month.

For example, let’s assume the interest each month is $1000.  After the first month the total loan becomes $201,000.  After the second month, the total loan amount is $202,000, and so on.  You are not making payments, so you are saving that money each month.  Moreover, you have the remaining $110K from the net profit from the sale of your original home to invest in other areas.

When you eventually decide to sell that home, let’s say it’s worth $350K, and your reverse mortgage loan is $250K.  That loan will be repaid out of the sale price, and you will again net $100K.

Reverse mortgages are often a great way to ease financial burdens, later in life.  Because you make no payments, extra liquid cash is freed up for you to enjoy yourself in your retirement years.

Feel free to contact me with additional questions at fred@affloans.com