Mortgage and APR and Interest Rates and Oh My...!

muninn

I am currently shopping for a mortgage loan as a first time home buyer, and boy this stuff is overwhelmingly confusing.
One of the big issues I cant get my head around, despite the research I did, is mortgage rate vs. APR.

So Mortgage rates are interest you are paying over the life of the loan. Now APR is the interest rate combined with closing costs that the lender attaches. What confuses me is why are those costs rolled into my rate when these costs are paid in full during closing. Is APR just a "cheat number" to tell you the abstract value of the total cost of the loan, and not a binding interest rate that you pay over the lifespan of the loan?

One of the lenders claims that they "dont have APR", which makes me suspicious since I thought that APR are required by law?
Also what are variable charges that are rolled into the APR? One lender claimed that only origination fee is what differs between lenders, and all other fees are "unavoidable third party charges". But one would think that just because they are 3rd party, that doesnt mean they dont have variation between them. I mean lenders pick their own apprisal companies and such, so technically different lenders would have different 3rd party fees attached to them.

I hope my questions make some sense.

Also anyone has any advice when it comes to shopping for mortgage lenders? Any pitfalls to avoid?

Thanks in advance!

bowen

Where do you live? APR means annual percentage rate where I'm from.

Typically these are the important bits:

Down payment - how much you're putting down (usually a required % anywhere from 3-20%)
interest rate - % set by the bank/credit-score/gov't to be paid on the loan
APR/rate - includes the interest rate + additional things like points or loan insurance (PMI)
Closing - how much you need to pay for escrow, lawyers, appraisals, inspections, etc (usually includes down payment with it!)

Jasconius

just be aware of points... a point is basically you paying for a lower interest rate. when you see ads for mortgages scrutinize if they're advertising their interest rate "with points". It's somewhat common to lure people in with a super low rate generated by points

I don't have any opinion on whether or not you should buy points. It's a financial tool for you to determine on your own the benefit.

APR is a term that describes the true cost of the loan when other non-principle factors are accounted for, like PMI or lender fees, etc... your APR should be very very close to the actual interest rate.

muninn

I live in PA. I am not buying points or having PMI on my loan, so my question would be what other lender fees would be added besides the usual fees tht are paid at closing to the lender. I was under the impression that all lender fees are paid at closing so I would be moving forward paying the interest rate and not apr.

Djeet

APR disclosure became required by the Truth in Lending Act, and it is supposed to give you an easy way to compare various lender offers.

Say you have 2 offers that were marketed as being 3.75% and when you get the TIL disclosure you see one has an APR of 3.85% and the other has an APR of 3.95%. You immediately know the 2nd offer has more/higher fees than the 1st.

Those numbers were arbitrarily picked.

Edit: When I refinanced I found that the local high volume mortgage broker undercut all other offers (my credit union, as well as the online guys that heavily market).

Elvenshae

muninn wrote: »

I am not buying points

You might want to consider it.

Essentially, what you're doing is trading money now for money later. By paying a percentage of your loan up-front in the form of points, you are buying a lower interest rate, which translates into lower monthly payments over the entire life of the loan.

Depending on your bank, this can actually work out pretty well for you, especially if you're planning on being in the property for a long, long time (e.g., you plan on being there the full 30 years).

The thing to look at is how long it would take to pay yourself back that amount, and if it's anything under 5 years and you can afford the up-front costs, then you should seriously consider it. E.g., if by paying an additional $3,000 now, you could save $100 on your monthly mortgage payment, then it might make sense to do so.

Especially if you can still afford the original payment, in which case you can really accelerate your pay-off period - well ahead of what putting that up-front money into the down payment would do.

In short: with some slightly complicated math, figure out how much you can put down vs. the effect that has on your monthly payment amount and how long you're planning on being in the house, and see what works out best for you.

Djeet

muninn wrote: »

I live in PA. I am not buying points or having PMI on my loan, so my question would be what other lender fees would be added besides the usual fees tht are paid at closing to the lender. I was under the impression that all lender fees are paid at closing so I would be moving forward paying the interest rate and not apr.

Google "example good faith estimate". The HUD link is a blank form, but you can find examples with it filled out. Fees that could vary between brokers are origination fees, attorney fees, home inspection, mortgage insurance, title insurance, other stuff (they can tack on questionable fees like documentation fees and courier services and such). I think any property taxes you have to pay or reimburse would be in mixed in settlement amount.

The note is going to be at the "rate" and not the APR. When your mortgage gets securitized then the entity that bought it will get a debt of X amount at N rate. The APR is a rate calculated for the home buyer benefit, where they total up all the closing costs and amortize it over the loan term and generate a new "rate" to show you the difference your pay over time vs if there were no closing costs.

Let's say you will net borrow $200K at 4%, and your payments will be $1K. Now closing costs are $10K. APR is calculated by totaling up all you would have to pay over the life of the note including closing costs ($210K) and recalculating an "effective" rate. If that $10K were spread out among 360 payments then your monthly might be $1025. Since 4% on 200K across 360 monthlies is 1K, then a monthly payment of 1025 does not equate to 4% on 200K. That rate would be like 4.08%, so that's your APR. The true rate on the note is 4% since you will be paying 1K and that's what whomever receives your payment receives.

It's synthetic and a bit confusing.

Those numbers I pulled out of thin air.

It'd be a good idea to familiarize yourself a bit with all the forms before you start loan process. There is a ridiculous amount of paperwork and it's not obvious what everything means if you haven't done it before.

Farangu

The advice about APR given already is sound.

As for which lender to go with, go with one that doesn't make the process seem so confusing. A lender that's not going to make sure you're comfortable with things like understanding APR, or reading the HUD-1, or preparing for PMI
/escrow isn't one you want to stick with.

schuss

Farangu wrote: »

The advice about APR given already is sound.

As for which lender to go with, go with one that doesn't make the process seem so confusing. A lender that's not going to make sure you're comfortable with things like understanding APR, or reading the HUD-1, or preparing for PMI
/escrow isn't one you want to stick with.

Also - understand that if you use a broker, there's a good chance your loan will be sold shortly after you close, as some lenders only hold loans for 30 days and sell everything they write. Getting a good mortgage person can make the process incredibly easy and get discounts on many of the closing items (many have existing relationships with title places and whatnot, so you can often get discounts as they know the mortgage person has their shit together).
Alternatively, you can always get some of the best rates by just hitting zillow mortgage and working through some of the best quotes there, but you may have to do more of the legwork locally.

muninn

Thanks for all the answers and suggestions! This helps a lot!
Now my question is how do I hunt for lenders. I understand that contacting a bunch of them to compare rates should be a priority, but where do I start?

I did look at Zillow quotes, but some of them were so shockingly low, that I was worried about the legitimacy of the lender. There seems to be a very wide disparity in both APR and Mortgage rates between lenders, and most of them have names that are not familiar to me. Is there a rating board that could help guide me?

schuss

muninn wrote: »

Thanks for all the answers and suggestions! This helps a lot!
Now my question is how do I hunt for lenders. I understand that contacting a bunch of them to compare rates should be a priority, but where do I start?

I did look at Zillow quotes, but some of them were so shockingly low, that I was worried about the legitimacy of the lender. There seems to be a very wide disparity in both APR and Mortgage rates between lenders, and most of them have names that are not familiar to me. Is there a rating board that could help guide me?

A big piece of it is the program, as some will be quoting FHA or other types of mortgages, so make sure to filter only on the types you want. Also - rates are currently stupid-low, like 3.X%.

Djeet

Be prepared for the credit score your lender uses to be different from what you get when you run your own scores. Chances are they will be pretty close, but both at initial purchase and at refi their score for me was 50-60 points lower than what I was getting from myfico (which I thought would be most accurate since that site's run by Fair Isaac). For initial purchase I think that resulted in rate being 1% or more than the initial estimate; for refi it didn't matter because of LTV. Have also heard that sometimes the lenders score is higher than what you see as consumer. If they pull your credit, then get a copy of the report.

I went to bankrate to find lenders initially, but if you fill out any request-a-quote you will get lots of phone calls. They started rolling in not 10 minutes after I submitted. Also recall boxloans having pretty good rates, but they require good credit and they don't operate in every state. On initial purchase I went with the lender my buyers agent suggested. On refi I went with word of mouth at work.

Farangu

Going off of that, if you go to a bunch of different lenders and a lot of them pull your credit score, it will take a small hit from too many inquiries.

DevoutlyApathetic

Farangu wrote: »

Going off of that, if you go to a bunch of different lenders and a lot of them pull your credit score, it will take a small hit from too many inquiries.

MyFico disagrees:
"Research has indicated that FICO Scores are more predictive when they treat loans that commonly involve rate-shopping, such as mortgage, auto and student loans, in a different way. For these types of loans, FICO Scores ignore inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won't affect your scores while you're rate shopping."

To be fair places use different formulas but most of them understand shopping around for a rate and do not view it as a negative.

schuss

I would also add that I think AMEX and Discover both have your credit scores for free now on their online tools (only from 1 agency, but still). So if you have either type of Credit Card, you can see the current score for free.

mRahmani

Not trying to hijack the topic, but semi-related: I have a pretty good grasp of math, but there's a piece I'm missing. When you take out a loan, each payment breaks down into $X toward your principal and $Y toward interest. What I'm not sure on is how they determine how much goes to each. It's not a constant amount each time; the first payment might be $250 to principal and $250 to interest, while the last payment is $450 to principal and only $50 to interest.

Is there a standard formula out there that shows how banks break down your interest payment schedule?

azith28

The way it was explained to me, which may not be 100% accurate for your situation is that the rate you work out, say its 1000 a month, is going to be a flat % for principle and % for interest. But if you pay more then that amount, you can specify it is going to the principle amount. This means that if you pay off the principle faster, you save lots of money because you are shortening your 360 months to 300 or however much you are putting over the top.

Thundyrkatz

mRahmani What you are referring to is an Amortization Schedule. Its pretty easy to calculate it, but using a spreadsheet or an online calculator is the easiest method. here is a description that is pretty easy to follow

DevoutlyApathetic

azith28 wrote: »

The way it was explained to me, which may not be 100% accurate for your situation is that the rate you work out, say its 1000 a month, is going to be a flat % for principle and % for interest. But if you pay more then that amount, you can specify it is going to the principle amount. This means that if you pay off the principle faster, you save lots of money because you are shortening your 360 months to 300 or however much you are putting over the top.

It actually varies over the life of the loan and starts as almost all interest and little principal and ends up entirely principal.

Basically it goes like this. You borrow 100,000 over ten payments at 10% for each payment period.

First payment comes due, we charge the interests so you now owe 110,000. You're payment is something like 16,000 which is just the total cost divided by 10 (the number of payments). Of that, 10,000 pays for the interest we charged you, the rest goes to principal so you end up owing 94,000.

Next payment you owe like 103,000. This means interest is 9,000 this time since you owe us less. You still pay 16,000 but only like 9,000 is interest this time. At the end you end up owing like 87,000.

So on and so forth. I've rounded aggressively during this but hopefully you get the point. You're continually fully paying the interest on the money owed with the left over going to reducing the debt. As you keep going you end up owing less so have to pay less interest each time. Payments are typically fixed because that's just how people can cope with paying it back.

Heir

schuss wrote: »

I would also add that I think AMEX and Discover both have your credit scores for free now on their online tools (only from 1 agency, but still). So if you have either type of Credit Card, you can see the current score for free.

Mint.com does as well for free.

Aioua

Heir wrote: »

schuss wrote: »

I would also add that I think AMEX and Discover both have your credit scores for free now on their online tools (only from 1 agency, but still). So if you have either type of Credit Card, you can see the current score for free.

Mint.com does as well for free.

note that these scores are not always accurate, either because they're not working with a full dataset or they're not buying access to the proper FICO algorithms

also I've heard of them futzing with the scores/algorithms to make the numbers more swingy, in hopes of getting the consumer to buy more monitoring services or whatever

Powerpuppies

DevoutlyApathetic wrote: »

azith28 wrote: »

The way it was explained to me, which may not be 100% accurate for your situation is that the rate you work out, say its 1000 a month, is going to be a flat % for principle and % for interest. But if you pay more then that amount, you can specify it is going to the principle amount. This means that if you pay off the principle faster, you save lots of money because you are shortening your 360 months to 300 or however much you are putting over the top.

It actually varies over the life of the loan and starts as almost all interest and little principal and ends up entirely principal.

Basically it goes like this. You borrow 100,000 over ten payments at 10% for each payment period.

First payment comes due, we charge the interests so you now owe 110,000. You're payment is something like 16,000 which is just the total cost divided by 10 (the number of payments). Of that, 10,000 pays for the interest we charged you, the rest goes to principal so you end up owing 94,000.

Next payment you owe like 103,000. This means interest is 9,000 this time since you owe us less. You still pay 16,000 but only like 9,000 is interest this time. At the end you end up owing like 87,000.

So on and so forth. I've rounded aggressively during this but hopefully you get the point. You're continually fully paying the interest on the money owed with the left over going to reducing the debt. As you keep going you end up owing less so have to pay less interest each time. Payments are typically fixed because that's just how people can cope with paying it back.

you lost $10K with the first payment, should be $104,000 not 94,000 (then $113K/$97K)

Heir

Aioua wrote: »

Heir wrote: »

schuss wrote: »

I would also add that I think AMEX and Discover both have your credit scores for free now on their online tools (only from 1 agency, but still). So if you have either type of Credit Card, you can see the current score for free.

Mint.com does as well for free.

note that these scores are not always accurate, either because they're not working with a full dataset or they're not buying access to the proper FICO algorithms

also I've heard of them futzing with the scores/algorithms to make the numbers more swingy, in hopes of getting the consumer to buy more monitoring services or whatever

FWIW my score has consistently been stable or gone up slowly over time. And when I got my mortgage last fall the score was maybe 3 points off from the score they used.

DevoutlyApathetic

Powerpuppies wrote: »

DevoutlyApathetic wrote: »

azith28 wrote: »

The way it was explained to me, which may not be 100% accurate for your situation is that the rate you work out, say its 1000 a month, is going to be a flat % for principle and % for interest. But if you pay more then that amount, you can specify it is going to the principle amount. This means that if you pay off the principle faster, you save lots of money because you are shortening your 360 months to 300 or however much you are putting over the top.

It actually varies over the life of the loan and starts as almost all interest and little principal and ends up entirely principal.

Basically it goes like this. You borrow 100,000 over ten payments at 10% for each payment period.

First payment comes due, we charge the interests so you now owe 110,000. You're payment is something like 16,000 which is just the total cost divided by 10 (the number of payments). Of that, 10,000 pays for the interest we charged you, the rest goes to principal so you end up owing 94,000.

Next payment you owe like 103,000. This means interest is 9,000 this time since you owe us less. You still pay 16,000 but only like 9,000 is interest this time. At the end you end up owing like 87,000.

So on and so forth. I've rounded aggressively during this but hopefully you get the point. You're continually fully paying the interest on the money owed with the left over going to reducing the debt. As you keep going you end up owing less so have to pay less interest each time. Payments are typically fixed because that's just how people can cope with paying it back.

you lost $10K with the first payment, should be $104,000 not 94,000 (then $113K/$97K)

Er...no? I rolled the 10,000 in interest into the total debt which was why it was 110 instead of the borrowed 100. I know I sorta switched how I talked about it afterwards but I was trying to illustrate that you're continually paying the total interest on the period that just past. I did that with an amortization schedule in front of me because no way I'm gonna run those numbers in my head.

schuss

Aioua wrote: »

Heir wrote: »

schuss wrote: »

I would also add that I think AMEX and Discover both have your credit scores for free now on their online tools (only from 1 agency, but still). So if you have either type of Credit Card, you can see the current score for free.

Mint.com does as well for free.

note that these scores are not always accurate, either because they're not working with a full dataset or they're not buying access to the proper FICO algorithms

also I've heard of them futzing with the scores/algorithms to make the numbers more swingy, in hopes of getting the consumer to buy more monitoring services or whatever

Amex is Experian, so one of the 3 agencies that will be used. It's not like CreditKarma etc.

Djeet

The reason why your FICO scores may be different when you pull them vs when your lender does is because there are 49 different FICO scores, with more on the way.

When you pull your own credit through you're probably getting score base 8 or 9, and and your lender is likely using a different scoring algorithm that may or may not result in the same numbers.

CreditKarma uses VantageScore 3.

I haven't paid to pull my scores for awhile so I don't know if they give you anything more than base FICO 8's, which I'm pretty sure is what I got before.

mRahmani

That was the piece I was missing! Thanks @DevoutlyApathetic. I was forgetting that they recalculate interest every month, and the interest takes payment priority.