Getting a Mortgage? Focus on the A.P.R., Not the Interest Rate
One of the least remarked — but most important — numbers in residential real estate is the difference between a loan’s “face” interest rate, and what’s called the “A.P.R.,” or annual percentage rate.
The latter captures the interest rate plus all the costs and fees associated with that loan.
In other words, what you and I would call the true cost of the loan.
Conventional vs. FHA
So, at the moment, prevailing rates on a “conventional” 30-year mortgage for well-qualified borrowers are about 4.25%.
Meanwhile, the A.P.R. is about 4.40% — a scant .15% higher.
That’s what you like to see.
Now consider the corresponding numbers for FHA loans: 2.75% interest rate and 3.75% A.P.R., respectively.
If it’s not obvious, the latter number is a full 1% higher.
Especially considering all the additional red tape associated with FHA loans — call it the “hassle factor” — home buyers with strong enough credit to qualify for a conventional loan may now elect to go that route instead.
P.S.: the federally-required document showing the interest rate and A.P.R. for a given mortgage is called the “TIL,” or Truth-in-Lending disclosure (known to Realtors as “the one with the four boxes at the top” — see photo above).
Lenders are obliged to provide that to prospective borrowers — and prospective borrowers should be sophisticated enough to ask for it (or, they should have a Realtor who reminds them to 🙂 ).
