With so many loan options out there, it’s easy for a first time buyer to be overwhelmed. Traditionally, the often-repeated phrase is to save 20% before buying your first home. But with loans such as the FHA loan offering as low as 3.5% down, is 20% still necessary? Even conventional loans like the 30-year fixed only ask for a minimum of 5%. So what’s the benefit of saving the entire 20%?
When you get a mortgage, you are charged two different rates–the annual percentage rate and the interest rate. Understanding the difference between the two rates is important and will help you make an informed decision when shopping for the right lender and the right loan.
The interest rate is the yearly rate a lender charges for permitting the borrower to use money for a specific length of time. The rate is calculated by dividing the total amount of interest charged by the loan amount. For example, if a lender charges a client $60 a year on a loan of $1000, then the interest rate would be (60/1000) x 100% = 6%.
Annual Percentage Rate
The APR is a little more complex and is comprised of two factors: it includes your actual interest rate and any additional costs. Additional costs might include things like prepaid interest, private mortgage insurance or closing fees. Your APR represents the total cost of credit on a yearly basis after all charges are taken into consideration. It is typically higher than your actual interest rate because it includes these additional items and assumes you will keep the loan for the full term.
When shopping for a mortgage–“especially if it’s your first time”/home-buying/first-mortgage–it’s important to understand the terminology surrounding the mortgage process. So do your research. Find out as much as you can so that you understand the loan process to make an educated and informed decision when it comes time to choose a loan and lender.