Thinking about taking out a mortgage, but not sure what kind of interest rate you can get? Wouldn’t it be nice if they just had a chart where you could see what you can expect to pay with a certain credit score, down payment and other factors?
Well, they do – almost.
Fannie Mae’s Loan Level Price Adjustment (LLPA) Matrix and Freddie Mac’s Postsettlement Delivery Fee (PDF) matrices come about as close as you can get to a single chart telling you what you can expect to pay on a mortgage. Both detail the additional fees the lenders assess based on the borrower’s credit score, down payment, type of loan, type of property and other factors.
They don’t actually tell you what rate you’ll pay, but you can figure out what additional fees, if any, you’ll have to pay beyond what a "perfect" borrower might. And since the fees are commonly rolled into the interest rate – just the opposite of paying points – it’s a fairly straightforward calculation to see how your interest rate might be affected.
Both the LLPA and PDF break out a lot of possible situations that might cause you to pay more for your mortgage, like a cash-out refinance, high-balance adjustable rate mortgage, mobile home purchase, subordinate financing and the like. But for most borrowers, the primary things they’ll want to focus on, at least initially, are the credit score and loan-to-value matrices, or grids.
These grids list credit scores down the sides, and loan-to-value ratios (which correspond to down payments for purchases or home equity for refinancing) across the top. You find the range your credit score is in, see where that row interests with the column for your loan-to-value ratio, and viola! There’s the fee you need to pay for that combination of credit score and down payment.
For example, if your credit score is in the 700-719 range, you’ll typically pay an additional fee of 0.5 percent of the loan amount, as compared to someone with a higher credit score, according to the LLPA. In the 680-699 range, you’ll pay from 0.5 percent from 1.5 percent more, depending on your loan-to-value ratio. Lower credit scores pay even more; the premium ranges from 1.25 percent to 2.5 percent for credit scores in the 660-679 range.
You can also reduce your costs – borrowers with higher credit scores can actually get a 0.25 percent credit if their loan-to-value ratio is less than 60 percent (40 percent equity or more).
More fees = higher interest rate
Rolling the fees into your interest rate generally means you’ll pay a quarter percent (0.25 percent) more in interest for each full percent of fees. You can also pay the fees separately as a closing cost.
There may be other factors that will cause your rate to differ from that available to other customers using the same lender, but consulting the LLPA or PDF is a good place to start.
You can also seek a nonconforming loan, which are not sold to Fannie or Freddie on the secondary market. However, you may find that rates and fees for these types of loans exceed any savings you’d realize.
Showing posts with label APR. Show all posts
Showing posts with label APR. Show all posts
Wednesday, February 10, 2010
Using APR to Compare and Contrast Mortgage Lenders
Shopping for a mortgage can be complicated, with lots of different factors such as interest rates, fees, points and loan terms to take into account. Is there a simple way to compare offers from different lenders that cuts through the confusion and shows which is the best deal?
Actually, there is – almost. The annual percentage rate (APR) on a mortgage loan is designed to help you do just that. Although it’s not foolproof and you sometimes have to consider other factors as well, it is a great tool to help cut through the clutter and figure out what the bottom-line cost of a mortgage will be.
The APR takes all those things that make it hard to figure the cost of a mortgage – the interest rate, lender fees, discount points and loan duration (term) – and rolls them into a single number – the annual percentage rate. This number, which is similar to – and often confused with – the interest rate, shows what your actual cost of borrowing is. By law, the APR must be listed on the Truth-in-Lending statement all mortgage lenders are required to provide.
For example, consider two loans, both for $200,000 at 5 percent interest. Just for the sake of an example, we’ll say the first loan has no fees or points paid, so the borrower is simply borrowing $200,000 at 5 percent interest. On the second loan, however, the borrower is paying $5,000 in fees and points, which are included in the $200,000 balance the borrower owes. So in reality, the borrower is getting a $195,000 loan, with a $5,000 charge added right on top.
The APR takes into account this $5,000 charge in figuring the cost of borrowing $195,000 – the amount actually available for the borrower to use. It does this by spreading the $5,000 over the term of the loan – in this case, we’ll say 30 years – and rolling it into the interest rate. Taking that into account, it means the borrower is effectively paying an annual rate of 5.218 percent to borrow $195,000 over 30 years – even though the actual terms of the loan are $200,000 (including fees) at an annual rate of 5 percent.
Shows true cost of borrowing
That’s essentially how the APR works. It takes any fees you pay for a mortgage loan or refinance, and recalculates their cost as part of an interest rate. It’s a handy way of comparing loan offers with differing fees and interest rates. For example, you may have one loan offer at 5.5 percent, zero points and $2,500 in fees, vs. another at 5.25 percent, two points and $7,000 in fees. Your APR on the first might be 5.6 percent, but 5.75 percent on the second. The first loan is the least expensive, even though it has a higher interest rate.
The APR can be used to compare offers on adjustable rate mortgages, even though the rates may fluctuate over time. The way that works is, the APR is calculated assuming you’ll have the mortgage for the full term of the loan and simply pay the new rate whenever it resets. Because no one can predict what interest rates will do in the future, the calculation simply assumes the base rate, or rate index, that rate resets are based on will remain unchanged, so the calculation simply depends on how much the resets vary from the base rate.
Less accurate for loans held only a few years
The one major problem with relying solely on the APR to compare mortgage offers from different lenders is that it assumes you’ll hold the mortgage for the entire term. Remember, in our example above, the $5,000 in costs was spread over 30 years. However, if you sell the home or refinance before you’ve fully paid off the mortgage, you’ve had less time to amortize the fees – increasing the effective interest rate of the loan.
As a result, the APR tends to favor mortgages with low rates and high fees. If you think you might sell or refinance within 7-10 years, a loan with a higher rate and lower fees might be better. Though the APR can act as a rough guide, to get a definite answer, you’ll need to plug the interest rate, fees and other information in to a mortgage calculator and see how they compare for the length of time you plan to have the home.
Actually, there is – almost. The annual percentage rate (APR) on a mortgage loan is designed to help you do just that. Although it’s not foolproof and you sometimes have to consider other factors as well, it is a great tool to help cut through the clutter and figure out what the bottom-line cost of a mortgage will be.
The APR takes all those things that make it hard to figure the cost of a mortgage – the interest rate, lender fees, discount points and loan duration (term) – and rolls them into a single number – the annual percentage rate. This number, which is similar to – and often confused with – the interest rate, shows what your actual cost of borrowing is. By law, the APR must be listed on the Truth-in-Lending statement all mortgage lenders are required to provide.
For example, consider two loans, both for $200,000 at 5 percent interest. Just for the sake of an example, we’ll say the first loan has no fees or points paid, so the borrower is simply borrowing $200,000 at 5 percent interest. On the second loan, however, the borrower is paying $5,000 in fees and points, which are included in the $200,000 balance the borrower owes. So in reality, the borrower is getting a $195,000 loan, with a $5,000 charge added right on top.
The APR takes into account this $5,000 charge in figuring the cost of borrowing $195,000 – the amount actually available for the borrower to use. It does this by spreading the $5,000 over the term of the loan – in this case, we’ll say 30 years – and rolling it into the interest rate. Taking that into account, it means the borrower is effectively paying an annual rate of 5.218 percent to borrow $195,000 over 30 years – even though the actual terms of the loan are $200,000 (including fees) at an annual rate of 5 percent.
Shows true cost of borrowing
That’s essentially how the APR works. It takes any fees you pay for a mortgage loan or refinance, and recalculates their cost as part of an interest rate. It’s a handy way of comparing loan offers with differing fees and interest rates. For example, you may have one loan offer at 5.5 percent, zero points and $2,500 in fees, vs. another at 5.25 percent, two points and $7,000 in fees. Your APR on the first might be 5.6 percent, but 5.75 percent on the second. The first loan is the least expensive, even though it has a higher interest rate.
The APR can be used to compare offers on adjustable rate mortgages, even though the rates may fluctuate over time. The way that works is, the APR is calculated assuming you’ll have the mortgage for the full term of the loan and simply pay the new rate whenever it resets. Because no one can predict what interest rates will do in the future, the calculation simply assumes the base rate, or rate index, that rate resets are based on will remain unchanged, so the calculation simply depends on how much the resets vary from the base rate.
Less accurate for loans held only a few years
The one major problem with relying solely on the APR to compare mortgage offers from different lenders is that it assumes you’ll hold the mortgage for the entire term. Remember, in our example above, the $5,000 in costs was spread over 30 years. However, if you sell the home or refinance before you’ve fully paid off the mortgage, you’ve had less time to amortize the fees – increasing the effective interest rate of the loan.
As a result, the APR tends to favor mortgages with low rates and high fees. If you think you might sell or refinance within 7-10 years, a loan with a higher rate and lower fees might be better. Though the APR can act as a rough guide, to get a definite answer, you’ll need to plug the interest rate, fees and other information in to a mortgage calculator and see how they compare for the length of time you plan to have the home.
Wednesday, November 11, 2009
Mortgage Glossary Part 1
2/1 Buy Down Mortgage
The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.
Acceleration Clause
A provision that allows a lender to demand payment of the total outstanding balance or demand additional collateral under certain circumstances, such as failure to make payments, bankruptcy, nonpayment of taxes on mortgaged property, or the breaking of loan covenants.
Adjusted Basis
The base price of an asset or security that reflects any deductions taken on or improvements to the asset or security, used to compute the gain or loss when sold.
Affordability Analysis
An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Amortization
The gradual repayment of a mortgage loan, both principal and interest, by installments.
Annual Percentage Rate (APR)
Annual Percentage Rate. The yearly cost of a loan, including interest, insurance, and the origination fee (points), expressed as a percentage. Often applied to mortgages, credit cards, and automobile financing.
Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.
Appraised Value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
Assumability
A mortgage that can be transfered with no change in terms. If an assumable mortgage is transferred, the buyer assumes all responsibility for repayment. The original lender must agree to the transfer of an assumable mortgage.
All these terms may seem confusing! Let Center State Mortgage help you regain control and allow them to make your home loan process easy, fast, and affordable! Choose Center State Mortgage for buying your next home and give yourself peace of mind.
The 2/1 Buy Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long term rates; however, even keeping the loan in place for three full years or more will keep their average interest rate in line with the original market conditions.
Acceleration Clause
A provision that allows a lender to demand payment of the total outstanding balance or demand additional collateral under certain circumstances, such as failure to make payments, bankruptcy, nonpayment of taxes on mortgaged property, or the breaking of loan covenants.
Adjusted Basis
The base price of an asset or security that reflects any deductions taken on or improvements to the asset or security, used to compute the gain or loss when sold.
Affordability Analysis
An analysis of a buyers ability to afford the purchase of a home. Reviews income, liabilities, and available funds, and considers the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that are likely.
Amortization
The gradual repayment of a mortgage loan, both principal and interest, by installments.
Annual Percentage Rate (APR)
Annual Percentage Rate. The yearly cost of a loan, including interest, insurance, and the origination fee (points), expressed as a percentage. Often applied to mortgages, credit cards, and automobile financing.
Appraisal
A written analysis prepared by a qualified appraiser and estimating the value of a property.
Appraised Value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
Assumability
A mortgage that can be transfered with no change in terms. If an assumable mortgage is transferred, the buyer assumes all responsibility for repayment. The original lender must agree to the transfer of an assumable mortgage.
All these terms may seem confusing! Let Center State Mortgage help you regain control and allow them to make your home loan process easy, fast, and affordable! Choose Center State Mortgage for buying your next home and give yourself peace of mind.
Subscribe to:
Posts (Atom)
