Archive for October 2017

How Is A Mortgage Interest Rate Different From Its Annual Percentage Rate (APR)?

If you want the best out of a mortgage, there are several things you will need to get right including picking the right mortgage lenders and making sure that your credit score is good before starting the application process. It’s also critical to understand some of the technical features of mortgages. Knowing how mortgages work puts you in a better position to negotiate for better terms, higher limits and more. It’s also an important tool for people who have current mortgages. By understanding the intricacies of a mortgage, it will be easier to monitor your mortgage and make beneficial changes such as refinancing the mortgage.

An important technical piece of knowledge is understanding the difference between a mortgage interest rate and its annual percentage rate. Interest rates are usually the starting point for negotiation or examination of mortgage terms, so it’s important to understand it thoroughly.

The interest rate

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This is the percentage of the mortgage amount that you will be charged for borrowing. There could be other fees associated with a mortgage, but the mortgage interest rate can be thought of as the base fee. When comparing mortgage services from different lenders, it is common to compare the mortgage interest rate to find out which is the best for you. This is important, but should not be the only variable you use to figure out what would be best for you.

The annual percentage rate 

On the other hand, the annual percentage rate is a mortgage fee which takes into account the mortgage interest rate and other fees that may be levied by the lender. For instance, a particular lender may provide a mortgage product that has a comparably low interest rate, but which has many other additional fees. These could be percentages or set amounts of money, and could be paid once or repeatedly. Many people consider the Annual Percentage Rate as the true amount of money that the mortgage will cost you.

Calculation of the APR

The mortgage interest rate is easy to calculate, since you simply get the interest rate and find out how much this translates to when you consider the amount you are going to apply for. The APR, on the other hand, is a little more complex to calculate. To do so, the lender’s fees are included in the interest rate, usually by amortizing these fees over the mortgage’s life. In essence, it assumes that they are additional payments. After all the additional fees are added this way, the new interest rate is then calculated.

This gives a true picture of how much you will spend on the mortgage, rather than focusing on the interest rate alone. It can be used in many other decisions besides choosing which mortgage to take, including getting a second mortgage in Montreal or choosing between static and variable interest rates.

When making the decision to get a mortgage, always ensure that you understand the true amount you will pay for it using the APR. High quality lenders will always be upfront and give you information regarding the extra fees you will be charged including the interest, so that you can get a true picture of the mortgage cost