Mortgage Calculators and APRs

Using a mortgage calculator should involve more than just analyzing the interest rate offered on a mortgage.  When a consumer is shopping for home loan to refinance an existing mortgage or to purchase a new house, consideration should be given to the costs of the loan and the APR.  Mortgage calculators are an excellent tool for determining how closing costs impact the costs of obtaining a loan over the life of the loan in addition to the loan interest rate.  Mortgage calculators should be used to allow prospective borrowers the ability to identify and understand the impact of the costs associated with a home mortgage loan.  Mortgage calculators are designed to help borrowers compare different loan options by measuring the closing costs, the term and the annual percentage rate.

Interest rates are the most noticeable part of any mortgage term or offer.  Evaluating the best deal isn’t as simple as looking for the lowest posted rate.  A loan with a lower interest rate but higher closing costs may end up being more expensive.  The best way to understand the overall cost of a mortgage is to look at its annual percentage rate (APR), which takes into account the interest rate and the loan’s other costs.   By using a mortgage calculator, a consumer can weigh the costs and benefits of costs on the interest rates of different loan products and offers. 

The Truth-in-Lending law requires all advertisements for home loan credit terms include the APR.  The APR is intended to enable consumers to compare terms of loan products from different lenders.  The rate is an expression of the effective interest rate the borrower will pay on a loan, taking into account the interest paid on the loan and certain one time fees and then standardizing the way the rate is expressed.  In other words the APR is the total cost of credit to the consumer, expressed as an annual percentage of the amount of credit granted.  The APR is intended to make it easier to compare lenders and loan options.  The calculation and disclosure of APR is governed by the Truth in Lending Act.  A mortgage calculator is essential to measure and compare APRs.

Some lenders will charge lower interest rates but more points than other lenders.  Points, a point equals one percent of the mortgage loan amount, are fees that the mortgage lender charges for making the loan.  The mortgage calculator allows the user to consider the advantages of paying more or less points to see which program is best for the type of loan being evaluated.  The APR provides a useful measurement for comparing the total cost of mortgage loans over time.  The key is to make sure that when a potential borrower compares mortgage loans the compare loans with similar terms or lengths.  Comparing the APR on a 30 year mortgage and a 15 year mortgage with or without the mortgage calculator is like comparing apples and chickpeas.

A mortgage calculator will give the user an opportunity to compare a loan with a lower stated interest rate that may have an overall negative value if its fees are too high.  Similarly, the mortgage calculator will help to determine if a loan with a higher stated rate with very low fees is a far better value.  APR calculations in the mortgage calculator incorporate these fees into a single rate.  You can then compare loans with different fees, rates or different terms.

Tags: 30 year mortgage, apr, home loan, mortgage calculator, refinance

This entry was posted on Saturday, December 6th, 2008 at 7:09 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.