{"id":4026,"date":"2024-10-11T08:56:27","date_gmt":"2024-10-11T13:56:27","guid":{"rendered":"https:\/\/tomo.com\/blog\/?p=4026"},"modified":"2025-02-10T13:01:12","modified_gmt":"2025-02-10T18:01:12","slug":"does-finding-the-lowest-apr-guarantee-the-best-loan","status":"publish","type":"post","link":"https:\/\/tomo.com\/blog\/does-finding-the-lowest-apr-guarantee-the-best-loan\/","title":{"rendered":"Does finding the lowest APR guarantee the best loan?"},"content":{"rendered":"\n

Lenders are going to show you multiple numbers when they give you a quote\u2014the interest rate,<\/a> the APR,<\/a> the points <\/a>(or costs for points), and fees.<\/a> Holding all these numbers inside your head is kind of bonkers, and not everyone wants to write formulas in Excel sheets to figure out the pricing, so a lot of agents<\/a> and other professionals try to keep it simple\u2014just look at the APR, they say. <\/p>\n\n\n\n

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But should they? Is that the best apples-to-apples way to compare pricing? We\u2019re going to break it down for you. <\/p>\n\n\n\n

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First off, what exactly is the APR? <\/h3>\n\n\n\n

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APR, or Annual Percentage Rate, represents the total yearly cost of borrowing, including interest<\/a> and fees. It’s a percentage that gives you a clear picture of how much you’ll be paying each year on your loan. APR is a handy tool for comparing loan offers because it consolidates various costs into one number, making it easier to see which loan might be cheaper in the long run.<\/p>\n\n\n\n

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Fees and Charges<\/td>Interest Rate<\/td>APR<\/td><\/tr>
Interest on the Loan<\/td>Yes<\/td>Yes<\/td><\/tr>
Loan Origination Fees<\/td>No<\/td>Yes<\/td><\/tr>
Underwriting<\/a> Fees<\/td>No<\/td>Yes<\/td><\/tr>
Mortgage Points<\/td>No<\/td>Yes<\/td><\/tr>
Mortgage Insurance Premiums<\/a><\/td>No<\/td>Yes<\/td><\/tr>
Other Closing Costs<\/a><\/td>No<\/td>Yes<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

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Is APR the best way to evaluate different loans?<\/h3>\n\n\n\n

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Not exactly. There are several limitations to keep in mind:<\/p>\n\n\n\n

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Factor<\/td>Explanation<\/td>Example<\/td>Impact on Long-Term vs Short-Term Costs<\/td><\/tr>
Differing ways of calculations<\/td>Lenders may include\/exclude different fees in the APR calculation, leading to discrepancies.<\/td>Lender A includes underwriting fees<\/strong> in their APR, while Lender B doesn\u2019t. This makes Lender A’s APR seem higher, even though both loans have similar overall costs.<\/td>Short-term: Might make a loan seem cheaper initially. Long-term: Can result in higher actual costs if fees are excluded.<\/td><\/tr>
Assumes Full Loan Term<\/td>APR assumes you will keep the mortgage for its entire term, which may not be true for most buyers who refinance or sell.<\/td>Loan A has a 30-year term with upfront points but you plan to sell in 5 years, making the APR less useful.<\/td>Short-term: APR might seem higher, but refinancing or selling early can avoid the long-term costs. Long-term: APR overstates the cost.<\/td><\/tr>
Impact of Upfront Costs<\/td>Paying points (prepaid interest) or fees can make the APR seem higher than it will be over the life of the loan.<\/td>Loan C has 2 points ($4,000) but a lower interest rate, leading to higher APR but lower long-term costs.<\/td>Short-term: APR seems higher due to upfront points and if you don’t plan to hang onto the loan for a long time this should be of interest. Long-term: Lower monthly payments and interest lead to better long-term savings, so if this is your forever home .<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

How should borrowers use APR when evaluating loan offers?<\/h3>\n\n\n\n

Borrowers should use APR as a baseline. If you are new to home buying, or quickly reviewing offerings, APR is a great, comprehensive starting point and will give you a more accurate portrayal of your loan cost than the interest rate alone. <\/p>\n\n\n\n

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What else should borrowers factor in when shopping for loans, in addition to APR?<\/h3>\n\n\n\n

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While APR is a useful tool for comparing loans, it shouldn’t be your sole deciding factor. It’s important to consider other aspects of the loan, such as:<\/p>\n\n\n\n