We probably couldn’t have thought up a more boring topic about your annual percentage rate, or APR, but it’s important to understand where this number comes from and why it really is important. And it’s not that complicated, either but many loan officers and even mortgage lenders in general have trouble explaining what the APR is, exactly, and how it should be used. Many times when a loan officer is asked “What’s this annual percentage rate number?” and the loan officer shrugs it off saying something to the effect of, “Don’t pay any attention to it, it’s just something we have to provide. Your note rate is what your payment is based upon.” But that really does the consumer some injustice. If it’s provided, it should be explained. Everything else is, right?
The annual percentage rate is best defined as the cost of money borrowed expressed as an annual rate. That’s all it is. And it’s easily explained. Your note rate, the rate used to calculate monthly mortgage payments, is hard-coded into your loan documents. It can’t change and if it does it’s because it’s an adjustable rate or hybrid, but the terms of the adjustments are also part of the note and can’t be changed by the lender throughout the life of the loan. The only time that can be different is if the borrower refinances the existing note altogether.
The APR takes both the note rate along with associated lender fees and finance charges needed to secure the mortgage and the rate. Individual loan programs offer different choices regarding the interest rate and can depend upon whether or not the borrowers want to buy down the rate with additional points or the lender assigns an available rate after a review of the application. There will be a note rate and there will be an annual percentage rate. The annual percentage rate will always be higher than the note rate due to the additional charges associated with obtaining the loan.
But borrowers in Miami should be careful when using the APR number to compare different options. And especially careful when comparing APR numbers on different types of loans. Borrowers are advised to use the APR as a tool to find the best loan offering but it doesn’t do any good if comparing APRs on different types of loans. For example, if you’re comparing a 15 year fixed loan with a 30 year it doesn’t work because the start rates are different.
With interest only loans however, the interest rate is the APR. There is no amortization period. The interest paid is “simple interest.” At CIVIC, all our loans are simple interest so it’s easy to select the ideal loan. Instead of comparing APRs, just select the term of the loan. If your project will take up to a year, then a 12-month, interest only loan is your best option. It’s easy at CIVIC. If you’re keeping the property for the long term, the APR is important. But if it’s a flip, it’s not an issue.Questions? Contact Dara Keo Today!