Lowest interest rate for mortgage loan
The "Best Deal" In Mortgages
This is why rate shoppers tend to use Annual Percentage Rate (APR) calculation to help with their comparisons. APR is supposed to represent the "true cost" of a mortgage over time.
However, it doesn't.
When you shop by APR, you may be less likely to choose "the best loan" for your needs. APR is among the most easily manipulated numbers in mortgages. Worse, many lenders count on you not knowing that.
APR is not the metric for comparing mortgages - it's merely metric.
What Is "APR"?
More commonly called APR, Annual Percentage Rate is a government-concocted math formula. It's meant to measure the long-term cost of a loan, from the date of closing to the date of payoff.
APR is roughly measured by taking the original loan size, accounting for closing costs and prepaid items, then estimating how many dollars will have to be paid over the loan's term to pay off the loan in full.
For a 30-year fixed rate mortgage, the loan's term is 360 months. For a 15-year fixed rate mortgage, the loan's term is 180 months. And so on.
APR attempts to answer the question, "If I borrow this much money, and it costs me this much to pay off my loan, what would my theoretical mortgage rate have been?"
APR is printed in the top-left corner of the Truth-In-Lending Disclosure, as shown above.
Loan officers are required to disclose a mortgage's particular APR every time they make a rate quote. This is federal law, meant for consumer protection.
By showing APR alongside every rate mortgage quote, customers are purported to be empowered to make better, wiser home loan choices. And, in some cases, APR works.
In many more cases, though, APR fails - especially online. This is because APR can't be the "apples-to-apples" comparison tool it's advertised to be.
The loan with the lowest APR isn't always your best loan.
APR Is Not An "Apples-To-Apples" Comparison Tool
Banks and lenders love to promote their "low APR loans" - especially online. In fact, by default, most online mortgage marketplaces sort their quotes by APR.
This means that the loans with the lowest APR show up first, follow by loans with higher APR. This can be misleading. Getting a low APR doesn't mean you're getting a good deal.
The APR formula is flawed. Here's why.
When your lender calculates an APR, it's estimating your long-term cost on your loan.
In order to make that estimate, the lender has to predict the future, while making drastic assumptions about what may or may not happen.
Here are three such assumptions :
- The APR formula assumes that you will hold your loan for 30 years
- The APR formula assumes that you will never make an extra principal payment
- The APR formula assumes that you will never refinance or sell your home
And, for loans with private mortgage insurance (PMI), the APR formula makes an assumption for the specific month-and-year that your home will reach twenty percent equity; that your PMI will go away.
This is impossible and it's for these reasons that Annual Percentage Rate fails.
When comparing loans with discount points to loans without discount points, loans with discount points will nearly always show a lower APR even though the loan may not be "cheaper".
Loans with discount points are front-loaded with fees and can be a terrible choice for somebody living in a home for less than ten years.
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Find a local, licensed loan originator who works for a non-depository mortgage lender OR a mortgage broker. Either of these entities (and not a bank) will be able to help you locate a lender willing to lend. You do not have to be a U.S. citizen to obtain a mortgage in the U.S. Here's another trick. The industry uses this website as a way to shop and see what lenders have to offer their customers: