Apples-to-Apples Rate Comparisons

by Richard Barrington
NFNS Columnist

One of the most important aspects of knowing how to refinance successfully is making apples-to-apples comparisons between mortgages.

Why is this so difficult? The natural tendency is to compare interest rates, yet interest rates are only one component of total mortgage costs. Try to make an apples-to-apples comparison by analyzing your Truth-in-Lending disclosure forms and knowing the loan's Annual Percentage Rate (APR). Both are essential for your how-to-refinance toolkit.

Rates, Points, and Other Costs

Not all interest rates are created equal. They can come with different fees and points charged upfront by mortgage lenders, and these expenses can vary.

Points are paid upfront to the mortgage provider, and borrowers may choose to pay points in return for better terms or a lower interest rate: This is called "buying the rate down" in the lending industry. One point equals 1 percent of the loan amount, so for a $100,000 loan one point would cost $1,000. However, that lower interest rate isn't necessarily cheaper -- it depends on how much you're paying to get it.

Using APRs

Understanding annual percentage rates  is vital to knowing how to refinance successfully. The APR is a calculation of what you are really paying for your loan, factoring in interest rates, fees, and points. You'll see it expressed as an interest rate, but it will almost always be higher than the loan's stated rate. When comparing APRs between loans, make sure that you are comparing the same loans. An APR comparison between a 3/1 ARM, or an adjustable rate mortgage, and a 15-year fixed loan will be meaningless.

The key is to use APRs to make the most accurate comparisons between prospective mortgage lenders. However, when you are measuring what you would save by refinancing an existing mortgage, keep in mind you've already paid the upfront costs. Be sure to compare the stated interest rate of your existing mortgage against the APR of a potential mortgage.

About the Author
Richard Barrington is a freelance writer and novelist who worked as investment industry executive for over twenty years.
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