Here’s What It Helps To Know About Interest Rates, Points And The “Mysterious” APR

When you get a mortgage, there are three important terms four you to remember.

• Interest Rates
• Points, &
• APR

I have combined these three terms here because they are related, and you will understand them better if I explain them together.
Interest Rate
“Interest Rates” are the price that lenders charge for the use of their money.  So, when interest rates are high, it’s because lenders are charging more to use their money right now.
Again, it’s a trade-off between now and later.  Lenders are only going to give you so much money to use over the next 15-30 years (the life of your mortgage).  They work backwards from that figure using interest rates.  If you have a higher interest rate, you have less money to spend now.  If you have a lower interest rate, you have more money to spend now.
Points
Now I want to tell you about a word – it’s one of those words that doesn’t mean what you might think it means when you hear it. (You know, when the waiter at the restaurant ask you if you would like your “Check”…and somehow you that what they really mean is your bill, but you say “Oh yes, thank you.”)
When you hear the word “points” what do you think of?  Maybe points in a football game?  Maybe a test score?  Well, some smart person in the mortgage industry started using the word “Points” to mean one percent of your entire loan amount, that you get to pay up front, as a fee for certain things.
So let’s say your mortgage is for $200,000.  One “Point” would mean $2,000.  Now I will tell you about the third term and how it relates to the first two.
APR
“APR” stands for “Annual Percentage Rate.”  Now that sounds friendly, too, doesn’t it?  The APR is what you get when you add the interest rate, the points, and all the other fees together and then calculate what the loan will cost you each year, based on all of the fees added together.
Make sense?
Lenders are required to tell you what the APR is on any loan that they are offering to you so that you can know what the real interest rate is, including all of the additional costs.
So when you are calling around looking for the best rates, make sure and ask what the APR is on each loan that you are being told about!