New Understanding the mortgage process: Your Home Loan Toolkit (801) 903-2993

APR & Rate: Knowing the Difference






Copied to clipboard






Copied to clipboard

Utah Mortgage Rates, Mortgage Rate Utah, Mortgage Rates Utah

These are among the top searches on Google relating to mortgages for the state of Utah.  What's the reason for this?  Would rate be the most important factor?  Is there a difference between interest rate and Annual Percentage Rate (APR)?  Do Conventional, FHA, VA, USDA, ARM’s, & Jumbo loans have better rates than each other or are they all the same?  Let’s dive in and see what we can clear up for you about the broad search and find out if it’s a search you should be making when shopping for the best ‘Utah Mortgage Rates’!

Is there a reason why?

The answer to this is an ASTOUNDING yes!  The rate you have for a mortgage directly affects your monthly payments.  I mean, what makes a mortgage better than having the lowest possible payment?  The lower your payment the more money you get to spend on yourselves!  Also, as a quick “ballpark” style example, some people will buy a $250,000 home and end up paying close to $438,000 or more for it!  Buying a home is a HUGE commitment and you want to make sure to not just consider one item, but to consider the whole life of the loan.

Is rate the most important factor?

I’m going to jump to the next question first to clarify the two types of rate and then we’ll come back to this.

Is three a difference between interest rate and annual percentage rate (APR)?

Yes, yes, and yes.  Absolutely there is a difference.  Quite honestly, there is a HUGE difference between the two and it could save or cost you thousands and thousands of dollars

Let us start with Interest rate.  The interest rate is simply the amount of interest that the lender will charge you for using their money to finance your home.  If you borrow $100,000 and have an interest rate of 5%, then you would end up paying $5,000 a year (paid out evenly with your chosen mortgage payment schedule) just in interest.  So, after 30 years, interest alone would end up costing you $5,000 a year x 30 years = $150,000.  Over the full life of the loan that is a huge amount.

Next, we have the Annual Percentage Rate, commonly referred to as APR. The APR is going to factor in ALL costs that will be accrued over the life of the loan.  These costs can be broken down into categories and subcategories.

The biggest factor will be the interest rate. Looking at the example above, you can see how much money is paid just by the interest accrued on the financed amount alone.

Next there will be closing-costs. Closing costs can vary from broker to broker and lender to lender. In general, they will include Origination Fee, Title Fees, Appraisal Fee, Underwriting Costs, Processing, and Credit Report Fee. After all of these are added up the final closing costs will include any Loan Discounts or Lender Credits that you may receive.

So, is rate the most important factor?

Back to this question. The answer is yes. The ONLY answer is YES. Depending on the type of loan you’re getting, you may find yourself focusing more on Interest Rate over APR and other times and situations you will look at APR over Interest Rate. As an example, home buyers that need a down payment assistant programs may find themselves “handcuffed” with a higher interest rate. I don’t phrase it this way to have any negativity attached. In this situation, the home buyer will be tied to whatever programs are available and will have to stick to those to ensure they can achieve their dream of home ownership. This way of shopping for homes will end with buyers looking for the lowest Interest rate.

On the other side of the coin, we could find ourselves working with a home buyer that may have just sold a home. Now, they have cash for a large down payment, which can make for far friendlier interest rates and far more programs at their disposal where they can pick and choose what best fits them and what they are most comfortable with. Along with this route, these buyers are going to be far more interest in a favorable APR.

As an industry wide consensus, APR is the easiest and best way to compare rates between companies for any loan. (Side note, APR came about in conjunction with the Truth In Lending act to protect borrowers from deceptive sales practices. APR was made for the sole purpose of letting borrowers know the total cost of the full life of a loan.) We will end this with a quick back up plan for comparing companies with a scenario.

For example...

To the average homeowner, to "buy down" rate may not be something they fully understand. If you offer a lower interest rate to win their business, they may have no idea that part of their closing costs are going to include an unnecessary “loan discount” (which is actually a cost, it’s a purchased discount, not a given discount). An example of this would be a consumer buying down rate on the purchase of their $250,000 home. If the loan officer wants to “match” another competitor they may have to drop .5% in rate, which costs 2 points (1 point equals .25% of rate) to the consumer to get that. This will end up being an additional $5,000 in closing costs. That is a HUGE chunk of money that you’re now on the hook for.

That being said; the backup plan to is to compare 2 items and choose the better option, Interest Rate and Closing costs. There are various items that some, ethically challenged, loan officers may be able to manipulate. Interest Rate and Closing Costs are both items in which they cannot change, ever.

Do Conventional, FHA, VA, USDA, ARM’s, and Jumbo loans have the same rates?

No.  Each type of loan will have an interest/annual percentage rate attached to it.  Some loan are built to have a lot larger costs associated with it to ensure the loan can happen.  A common scenario would be Down Payment Assistance programs (DPA’s).  These programs have higher than average interest rates but offer lower costs to a borrow to get into a home.  If your budget allows you to spend $2,000 on a mortgage but only $500 for savings.  You may find yourself in the situation to cover a monthly cost of a home, but no savings for down payment.  DPA’s could be a $100 or more a month in mortgage payments but have little to no money down.

On the other hand, you could have a consumer who has budgeted $1800 a month for a mortgage payment and $1,000 to savings. You may find yourself in the situation to cover the down payment for a home but not as much money to cover a large monthly mortgage payment.

Both result in a family being happy that they have a new home to live in.  Each scenario had a different program that would benefit the home-owner and each came with a different rate but ended with payments each family could afford for a similar home.

Utah Mortgage Rates, Mortgage Rate Utah, Mortgage Rates Utah

To sum this up, I think it may not matter what you type into google, it will come down to which Loan Officer you end up working with.  Start with a referral from someone you trust that has had a good experience with a Loan Officer.  Let them talk you through the home buying process and recommend which loan they think will fit closest to your needs.  Once that is done, start your quoting journey started and get a quote from him/her!

We always encourage our clients to get a quote or two from another lender or bank. (If your lender guides your away from this that is a HUGE RED FLAG and I’d recommend thanking them for their time and move on).  We do this so home buyers will cover their bases and give them comfort once they make their final decision.  At the end of the day, your comfort and happiness are the most important thing to a Loan Officer.