After reading this article you will have empowered yourself with critical knowledge on the varying mortgage rates. Informed consumers get the best deals when shopping around.
We’ve also included insights on how to calculate the various interest rates as well as resources to make sure you find the best deal.
Nobody wants to sign up to an expensive mortgage. It takes time and research to get the best option for you. We advise investing time into researching the caveats of the mortgage landscape. These “search costs” pay off in the long run and many consumers neglect to consider all options available to them.
The mortgage application process in this post-bust housing era can be a lengthy nightmare. With steep credit score requirements and debt-to-income cutoffs as well as the ‘devil in the detail’ fine print, it can all seem overwhelming. We put a lot of emphasis on giving you impartial advice, such as this first-time buyers mortgage guide, so that you can navigate this uneven terrain confidently.
What is a mortgage interest rate?
This percentage is what is most commonly advertised in mortgage lending services. It’s what lenders will advertise when you start shopping around for a mortgage. The interest rate on your mortgage is made up of the principal and the interest. The principal is the money you’ve borrowed from the lender, and the interest is the rate that you agree to pay the lender in return for your loan. Paying the interest on your mortgage does nothing to reduce your debt. Debt reduction happens when you pay back the money on your principal.
Most lenders now offer discount points generally cost 1% of the total mortgage amount and decrease the interest rate by approx. 0.25%. The reason that I mention these is that some providers are now advertising interest rates with the inclusion of discount points. This will lower the mortgage interest rate to make it appear more competitive in comparison to other products on the market.
What is an APR?
This rate is what most people will need to know to get the true cost of their mortgage. I’ll get into more detail in the next section on the difference between mortgage interest rates and APR. For now though, the APR on your mortgage includes the annual cost of interest plus fees charged at closing.
After looking into a few mortgage products, you’ll see that many products include similar expenses in their closing costs. These include credit reports and property appraisal fees. However, lenders often include extra costs. These hidden costs are not accounted for in the APR. Many consumers won’t pick up on these financial subtleties which leads to profits for the lender.
When given rates for adjustable rate mortgages, they will quote you an APR for the fixed rate period. The significance of the various rates from interest to APR depends on how long a mortgage will be relevant to you. If you plan on refinancing or moving house within a couple of years you can see how using an APR is not the best way to view the cost of the mortgage to you.
What’s the difference between mortgage interest rate and APR?
The APR of a mortgage is made up of the mortgage interest rate plus other charges. These can be made up of:
- Interest rate
- Other charges
All these extra expenses factored into your APR shows the true cost, despite a few exceptions, that you will inevitably be paying back. It’s important to keep in mind that although banks and other lending facilities are legally bound to including closing costs into the APR, it still doesn’t factor in the entire picture. Third-party fees, including appraisals, may be excluded from the lender’s APR.
The mortgage interest rate represents the fee that you will be paying back for borrowing the capital but doesn’t include the transactional costs. Without fail your APR is going to be higher than your mortgage rate.
Compare like with like
So you may be thinking now that mortgage rate is just a term to trick customers into thinking that the rate is cheaper than in reality. However, both rates have their uses in tracking the lifecycle of your mortgage.
If you’re planning on taking out a mortgage with a down payment less than 20% of the property you may need to take your mortgage insurance. It’s crucial to factor in that some APR include this into the rate while others don’t.
Calculate your Mortgage APR
We’ve created an example of five different scenarios on a $300,000 mortgage. As you can see the interest rate is static but depending on the closing fee or term length you are looking at various APR.
In these examples, you can see how adjusting elements of a mortgage cause the APR to fluctuate where interest rates remain static. Here is a mortgage calculator to help you get to grips with how your mortgage interacts with various elements such as discount points, term length and closing costs.
The Bottom Line
There are a lot of caveats when applying for a mortgage, and it can be difficult to compare different products. This disparity is in part because of the different types of rates you may be quoted but also because these rates in themselves may not be consistent in what costs they include or exclude.
That’s why we have a mortgage guide to help you see through the thicket of mortgage jargon and find the best mortgage for you. Our comparison tools allow you to explore all mortgage package available to you.
Looking to speak with an expert, click the below link to connect with a Mortgage Specialist from BMO. There is no obligation to you, and they can help you any further questions or concerns you may have on your mortgage journey: