The Difference Between Annual Percentage Rates and Interest Rates

 If you are looking around for the best rates and options for a mortgage, then you are probably familiar with interest rates and annual percentage rate (APR). The majority of consumers think that these are one and the same, but they are not. They are related but that is as close as it gets.

What is the interest rate?

Simply put, interest rate is the percentage you pay to borrow the principal amount on your loan on an annual basis. The interest rate applies to the life of the loan, from the day it’s borrowed to the day it’s paid off. There are two types of interest rates, fixed or variable. When you get a fixed interest rate, the interest rate stays the same throughout the life of the loan. A variable rate varies and will change over the life of the loan. A variable rate is based on the prime rate and when the prime rate changes, so will your variable rate. This means that the payment on your variable rate will go up or down when the Fed moves to change the rate.

What is APR?

This can be a bit confusing but just remember that the interest rate is what the lender will charge the borrower for the loan. The annual percentage rate is the total price of the loan expressed as a percentage. The annual percentage rate will include lender fees as well, so the APR will be the same as the interest rate if the loan does not have any additional fees. If the loan does have additional fees, then the APR will be higher.

Why do you need to understand both APR and interest rate/?

When you are shopping for a loan, you want the lowest rates. Most consumers look for the lowest interest rate but if they do not include the APR rate, they will not get a full picture of the amount they will owe. The interest rate only calculates the cost that it will be to borrow the principal, but the APR will give you the cost of the total lifetime cost of the loan. For example, if you borrow $15,000 to be paid over 72 month at an interest rate of 7.99% with no origination fees, the APR will also be 7.99%.

How are interest rates calculated?

When determining your interest rate, a lender will look at your credit history, application information and the terms you selected. This means that the better your credit score is, the better interest rate you will be able to obtain. So getting your credit score the highest you can get it will get you the lowest rate. To ensure that you have a healthy credit score, you need to pay your loans and bills on time, do not use all of your credit that is available, pay any debt you have down, and don’t apply for a new loan or credit cards right before you are applying for a mortgage.

How is APR calculated?

When APR is calculated, a lender will take into consideration your interest rate, finance charges, and fees you will have on your loan. Remember that the APR can be affected by the origination date and your payment’s due date.

All financial decisions are a big part of your life, so you need to make them wisely. Remember to get all of the facts before you decide to borrow. If you are working with a real estate agent, they can refer you to a lender that is right for you.

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Tips For First-Time Home Buyers

 Buying a home is one of the most exciting adventures, however it can be both exciting and stressful especially for first-time home buyers. Here are several tips to follow when you are looking to purchase a home.

Don’t buy a home primarily as an investment

Even though home prices are on the rise, this will not always be the case. If you are looking for a financial return, you might want to stick with the stock market. Owning a home should be more of a personal investment than a financial one. If you are unsure of your job location in the next five years, then owning a home might not be in your best interest right now. Remember, you need to own your home for more than five years to really see a good return on investment.

Know what you can afford

There are tons of mortgage calculators that can help you determine how much of a home you can afford. The amount you are able to borrow depends on many factors, especially on your monthly income and your other financial obligations. In general, your housing costs should not be over 31% of your gross monthly income.

Check your credit score

A good credit score means a good mortgage rate. If you have a high credit score, then you will qualify for a lower mortgage rate. Before you start the home buying process, check your credit report to see if you need to improve your credit before purchasing a home. Remember, paying your bills on time and keeping a low credit card balance can help improve your score.

Understand the other costs involved

There are more costs involved than just the monthly mortgage payment. You will also be responsible for property taxes and homeowner’s insurance. Other costs will include your closing costs, home inspection and some communities have HOA fees. These can be a lot when added onto your monthly expenses.

Plan to put down at least 20%

The rule of thumb is usually a lender will want you to put down 20% of the home’s purchase price. If it is any less, you will be charged PMI (private mortgage insurance). You will have to keep paying PMI until your loan-to-value reaches 80%. Also, if you put down a bigger down payment, it means you are a serious buyer who wants to win the bidding war.

Know what documents you will need for your loans

When you are ready to get approved for a loan, you will need certain documents for the lenders. These include the sales contract, financial statements, pay stubs, previous W2s, IRS forms and homeowner’s insurance policies.

Once you have these documents you are ready to get pre-approved for a loan. Getting a pre-approval lets others know that you are a serious buyer. If you are considering purchasing a home, hire a local real estate agent that can help you with the home buying and lending process.

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Truth and Myths About Improving Your Credit Score

 One of the most important factors for your financial health is your credit score. If you do not have a good credit score, you are more than likely going to have a hard time obtaining a mortgage. So before you think about buying a house, here are some truths and myths about how you can improve your credit score.

1. Truth: Late payments can hurt your credit score

Payment history is a big part of your credit score. In fact, payment history makes up around 35% - 40% of your credit score. Paying bills late is a crime when it comes to your credit health. If you are having a hard time remembering to pay a bill, set an account alert on your phone or calendar to remind you to pay a bill.

2. Truth: You should always use credit cards responsibly

Focus on your credit behavior when calculating your credit score. Be responsible with your credit history because this can improve your credit score. Do not spend over your means and try to pay the balance in full each month.

3. Truth: It’s important to stay below your credit card limits

You should not max out your credit cards. This can raise a red flag about your ability to handle debt. Do not use over 30% of your available credit to avoid this. If you have a limit of $1,000 on your credit card, you should not have a balance over $300 month to month.

4. Myth: You shouldn’t review your credit report

This is not true! It is recommended to obtain your credit report once a year.  Keep in mind: by federal law, you are entitled to one free credit report per year from each of the three credit reporting bureaus. There are two kinds of reports that can be pulled for your credit. A soft credit is when you check your credit or a creditor checks your credit to be preapproved. A hard credit report is for when you apply for a new line of credit. It is very important to understand your credit so you can improve it and make sure there are no outstanding balances you have missed.

5. Truth: Having no credit is worse than having bad credit

Again this is a myth because creditors want to see how you handle your debt. Having multiple credit lines is okay however you need to pay on time and keep your balances low. If you have no credit, think about opening a small credit limit. Never open several credit lines one after the other.

6. Myth: I should close credit lines I’m not using

Closing old accounts that you might not be using at this time, can negatively affect your credit score. Keep the line open with no balance, this is actually more positive than removing it.

Remember your credit score will be taken into consideration when you are getting approved for a mortgage. A higher credit score will allow for a better interest rate. If you get a better rate, you will be able to have a smaller monthly payment.

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Steps To Take Prior to Obtaining a Mortgage

Applying for a mortgage is one of the most important steps in purchasing a home unless you are lucky enough to just pay cash. Getting a mortgage is a big stress factor when it comes to buying a home. Planning can help the process run much smoother. Below are six important facts to know when it comes to mortgaging your dream home.

1. Define a realistic budget

What you can afford makes a big difference when budgeting for a home purchase. Apply for a loan that you know you will be able to pay. Your monthly mortgage payment should be 28% of your income according to most lender's standards. If you have any other monthly debt payments, those added to your monthly mortgage payment should not exceed 36% of your total income.

2. Improve Your DTI (debt-to-income) ratio

This is a very important figure to a lender. A lender will want to know your DTI ratio to determine how much they can loan you. You are in luck if your DTI is 0 - 36% because you should have no problem with your desired mortgage. If your DTI is above the desired percentage you still can obtain a mortgage by lowering your DTI. A good way to accomplish this is to reduce or pay off current debts.

3. Make a huge down payment

The higher your down-payment the better your rates will be. A high down payment can also allow you to have better terms with your mortgaging services. Your monthly DTI can be reduced if you have a lower mortgage payment due to a big down-payment usually over 20% of your borrowing amount.

4. Boost your credit score

Your credit score can also boost or hinder your loan rate. If your credit score is low, avoid debts, make your payments on time to help boost your credit score.

5. Prepare the necessary paperwork

When you are applying for a mortgage, you will need to provide a lot of paperwork. The lender will ask for things such as pay stubs from the past month, your tax returns for at least a year, and bank statements for a few months. Some lenders might also ask for credit cards, loan statements, retirement funds, and other investments.

Being prepared and having everything in line will make the mortgage application process run smoothly and will be less stressful. Remember using a mortgage lender and a Realtor is the best way to ensure a smooth transaction.

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