How to Understand the Annual Percentage Rate (APR) on Your Mortgage Loan

The federal government requires mortgage lenders to disclose the "annual percentage rate" (APR) whenever they advertise a loan program. But what is APR, and does it really matter to you?

Here's the thing: APR lumps all your "finance charges" into your interest rate. As you can see from Figure 1, some of your closing costs are considered "finance charges".  APR is calculated by adding all these finance charges to the total interest that you'll pay over the life of the mortgage, and then calculating an annual interest rate based on that total number.

Figure 1: APR Costs (Finance Charges) vs. Non-APR Costs

APR Closing Costs & Prepaid Items (Finance Charges)	Non-APR Closing Costs & Prepaid Items
Origination Charges and Points	Application Fees
Processing and Underwriting Fees	Appraisal Fees
Mortgage Insurance (monthly and upfront)	Credit Report Fees
Closing Agent Fees Retained by Mortgage Company, or Closing Fees in Excess of What You'd Be Charged if You Paid Cash	Title Fees & Title Insurance
Tax-related Service Fees	Pest or Flood Hazard Inspection Fees
Administrative and Wire Transfer Fees	Stamp and Transfer Taxes
Pre-paid Interest	Pre-paid Escrows for Taxes and Insurance

Here are three little-known facts about APR:

#1 - All Seller-Paid Points and Closing Costs Are Excluded from APR

This means that your APR will be lower if the seller is contributing funds toward your points and closing costs.

#2 - The APR on an Adjustable Rate Mortgage (ARM) Follows a Different Formula

When you have an ARM, the APR is calculated by looking at your "fully indexed rate".  This is the interest rate that you would pay if the loan adjusted today.  For example, if you have a 5 or 7 year ARM, the APR on your loan is not calculated based on the rate you pay for the first 5 or 7 years of your loan.  It's based on what your interest rate would be in 5 or 7 years if the index remains the same as it is today.  See Figure 2 for an example of a fully indexed rate.

#3 - The APR Does Not Take Into Account How Long You Will Keep the Mortgage

Most people only keep their mortgages for 5-7 years.  Chances are that you'll refinance or sell your home at some point before the loan ends in 15 or 30 years.  Therefore, when you compare your mortgage options, it's probably smarter for you to look at what your total costs will be over 5, 7 or even 10 years vs. focusing entirely on comparing the APR.  Remember, APR is simply one measurement of the cost of your loan... and it may not be the most accurate measurement for your purposes.

As a Certified Mortgage Planning Specialist (CMPS®) I'd be happy to review your situation and help you compare your options.  Contact me for more information!

---

Aundrea Beach-Greco
NMLS Number: 333739 | CA-DBO 333739
CMG Financial | The Beach-Greco Team
Corporate NMLS Number: 1820
info@aundreabeach.com
http://www.ilendlasvegas.com
(702) 326-7866
8337 W. Sunset Road, Suite 300
Las Vegas, Nevada 89113

Four Questions to Ask Before Choosing a Mortgage or Buying a Home

These four questions can help you make smarter mortgage and housing choices:

1. Why is it better to buy a home right now vs. renting a home?  Buying a home usually requires more upfront capital, more ongoing expenses and a longer term commitment.  Make sure to run the numbers with a certified professional to evaluate whether you'd be better off buying vs. renting.
2. How can I make sure this fits into my short-term and long-term budget?  Make sure to strategize with a certified professional and compare your options when it comes to:
   • Choosing a down payment amount and strategy
   • Choosing a monthly payment scenario
   • Choosing a price range for your new home
3. How will this financial decision impact other areas of my life?  Make sure to think through how your cash flow situation will impact:
   • Children’s college funding
   • Retirement planning
   • Taking care of elderly parents
   • Other large financial purchases or commitments
4. What mortgage and home buying strategy will result in less overall financial risk? The mortgage is most likely going to be your single-largest debt; and your home is most likely going to be your single largest investment. That’s why it's important to evaluate and compare your options with a Certified Mortgage Planning Specialist.

Contact me so we can get started!

---

Aundrea Beach-Greco
NMLS Number: 333739 | CA-DBO 333739
CMG Financial | The Beach-Greco Team
Corporate NMLS Number: 1820
info@aundreabeach.com
http://www.ilendlasvegas.com
(702) 326-7866
8337 W. Sunset Road, Suite 300
Las Vegas, Nevada 89113

   

Rates are super low - Consider a 15-year mortgage

Consider the benefits of a 15 year mortgage. 

Mortgage rates just keep heading lower, defying expectations. That’s nearly a half a percentage point lower than the rate just a year ago, according to Freddie Mac.

Meanwhile, home values have been heading higher. The S&P/Case-Shiller home price index of 20 major metro areas has gained 5 percent over the past year and is up 26 percent since late 2012.

Consider this. Let's say you took out a $250,000, 30-year mortgage at a 5 percent interest rate 10 years ago. Your monthly payment would be about $1,350. Now let's say you refinance that mortgage now into a 15-year loan at the recent average rate of 2.81 percent (for 15-year loans). Your monthly payment would rise to about  $1,425—an increase that could be palatable for you.

For the extra $75 per month, you’d save about $80,000 more in total interest costs than if you had chosen to refinance into a 30-year loan.

The combination means refinancing is now a very good option for more homeowners, especially those that have at least 20 percent equity in their homes.

With rates so low, it's also a good time to consider refinancing into a 15-year mortgage instead of a 30-year mortgage.

Typically, homeowners prefer 30-year mortgages. Halving the payback period often means making a much higher monthly payment. But with today’s super low rates, it makes a 15-year mortgage less of a financial stretch.

A 15-year loan only makes sense if you have the extra cash flow to comfortably afford the higher monthly payment. We have a free online refinancing calculator to help you run the numbers.

Qualifying for a 15-Year Mortgage

If refinancing interests you, check to see if you have at least 20 percent equity and an above average FICO score. FICO scores range from 300-850. According to mortgage data firm Ellie Mae, the average FICO credit score for borrowers who refinanced for a conventional mortgage recently was 732.

Ellie Mae also reported that borrowers whose refinancing applications were approved, typically had a mortgage payment that was 25 percent or less of their income. Their total debt payments (including the mortgage) added up no more than 38 percent of their income on average.

Keep in mind that taking out a new mortgage will come with closing costs. You can choose to pay upfront, or accept a slightly higher interest rate if you don’t want to use cash to cover your closing costs. The good news is that comparison-shopping from different lenders is now easier. Beginning last fall all lenders must give potential borrowers a standard Loan Estimate that itemizes all loan fees. 

Pay Your Loan Back Faster

If you have 15 years or less remaining on your existing mortgage you may not want to refinance, it makes sense to check out your options... you don’t want to start paying more interest now.

A better move would be to accelerate the payback on your existing mortgage. Let's say you have a monthly mortgage of $1,265. You're paying back a loan of $250,000 that charges a 4.5 percent interest rate. If you added $200 a month to your monthly payment, you could reduce the payback on a 15-year mortgage to around 12.5 years. This would also save you nearly $13,000 in interest costs. If you added $300 a month you could shorten the payback time frame to about 11 years and save more than $16,000 in interest.

We would be happy to calculate the numbers for you to see if it makes sense to refinance.

Call us!

Getting A Mortgage : How to find the right loan officer

How to Find a Mortgage Lender

Often the only factor people consider when choosing a mortgage lender is finding the lowest interest rate and fees. Of course, financial considerations are critical and you certainly should consider the different rates lenders offer on comparable loans, but you also want a lender you can trust, and someone you can work with effectively. Here are some suggested steps to find a mortgage lender:

1. Get referrals from family and friends who have bought or refinanced a home recently.

2. Talk to the lenders. Call or visit the lenders on your list. This will give you an initial feel for what it will be like to work with them.

3. Compare rates for similar loans. Among the things you’ll want to discuss with prospective lenders are the loan programs and rates they offer. But when comparing rates between lenders, be sure the rates are for comparable loans — and remember to include fees and other costs.

Get Acquainted with Types of Financing
The first thing to do is find out what the current rates are. You can get this information online or from your real estate agent. When comparing rates, you need to look at the annual percentage rate (APR), which includes interest, extra fees and costs amortized over the life of the loan. You should become familiar with the various types of loans available; fixed rate, adjustable rate, government-backed loans (FHA and VA), assumptions, blended loans, and more. FHA loans, for example, allow first time buyers to put 5% or less down. Check how rates are calculated (fixed versus variable), and whether charges are fully amortized over the life of the loan, or whether you’ll have to pay points up front and/or balloon payments at the end. Is there a prepayment penalty clause?

Finding the Right Kind of Mortgage
Which loans are best for you depends on such factors as:
• Your current financial picture;
• Potential changes in your finances;
• What your length of stay in the home will be; and
• Your comfort level with having your mortgage payment change from time to time.

For example, if you only plan to reside in the home for a year or two, starting with a lower Adjustable Rate Mortgage (ARM) might be the best choice. If you have no plans to move, and feel that inflation will rise rapidly, a fixed rate would obviously be better. The best way to find the “right” answer is to discuss your finances, your future plans and financial prospects, and your preferences frankly with a mortgage lender.
I am here to help!
Aundrea Beach-Greco
NMLS 333739
702-326-7866