Summary: Why do you need to be aware of your APR in Washington State? Initially, it will be the best way for you to compare mortgage loan offers from different lenders. Understand your APR for a good idea of what you will pay with your mortgage and what you will have to cover independently. Be aware of your APR and what’s included when presented with a mortgage offer to know you are getting the best deal. As always, consult your trusted mortgage professional with any questions.
APR, you’ve heard the term. Do you know what it means? When shopping for a home in Washington State APR may be the most important term you need to understand. Why do you need to be aware of your APR in Washington State? There are many reasons the most important of which comes down to dollars and cents. To put it more directly, understanding your APR could save you thousands of dollars.
Understanding Your APR Could Save You Thousands
Just what is APR? Its a fancy acronym that stands for Annual Percentage Rate. In the simplest of terms, APR is the amount you pay annually to borrow money expressed as a percentage of the total loan amount. So, what’s the difference between APR and your interest rate?
- Interest Rate: The interest rate is the dollar amount the lender charges you to borrow the money over the life of the loan expressed as a percentage.
- APR: The APR includes the interest rate and most of the fees that you paid directly to the lender.
Why do you need to be aware of your APR when purchasing a home in Washington State? When shopping for mortgage options, it just doesn’t make sense to consider the interest rate alone without any other costs. It’s impossible to get an accurate idea of the actual cost for caparison without an accurate APR.
There are lots of different mortgage products available today. Banks and mortgage companies are in the business of lending and the more varied products they can provide, the more customers they can appeal to. When shopping for a home mortgage, that means it is really important that you pay attention to the total cost of the loan so you can compare apples to apples.
Lower APR Doesn’t Necessarily Mean A Better Deal
In some cases, a lower APR doesn’t necessarily mean a cheaper loan. APR is calculated over the life of the loan, so it assumes you will carry the loan for the full term (usually expressed as a 30 year period). If you plan to pay your mortgage off early, the total cost including fees will not be spread over the 30-year term but instead over the term of ownership. This will result in a much higher APR.
There are other instances that can be just as deceiving. Advertised APR may fail to include things like private mortgage insurance costs. If you are planning to contribute less than 20% of the home’s value as a down payment, you will need to secure mortgage insurance which would have a direct effect on your monthly payment.
What Is Included In Your APR?
APR is used to express the true cost of borrowing money. Let’s take a look at some of the most common costs you should expect to see included with your APR.
Mortgage points or “Discount Points” are the fees you pay your lender upfront to reduce the interest rate (this is also known as “buying down the rate”). Generally speaking, 1 point is equal to 1% of the total mortgage amount.
Prepaid Interest is charged by the lender and reflects the amount of interest that accrues between the closing of the property and your first mortgage payment. For example, if you close on the 5th of June you would pay 25 days of “prepaid” interest.
Also known as a loan origination fee, underwriting or processing fee, this is the charge your lender assesses for preparing and evaluating your mortgage. Administration fees can include notary services and charges from the lender’s attorney, as well as any fees for document preparation. Usually, administration fees amount to no more than 0.5% of the total amount you’re borrowing.
The processing fee can range anywhere from $200.00 and includes all costs associated with processing your mortgage application.
Underwriters work in a variety of markets in addition to mortgages including investments and insurance. When it comes to mortgages, underwriters are responsible to evaluate and verify mortgage applications. This fee covers the cost of those underwriting activities.
Because it takes time and money to prepare your loan estimate, lenders typically charge between 50 and 100 dollars to cover the costs of preparation.
Private mortgage insurance or PMI is insurance you may be required by your lender to secure for a conventional loan if you are putting up less than 20% of the home’s value as a down payment.
This fee covers the service charges for the Escrow officer that assists with your closing.
What’s Not Included
After all those costs, there are still many fees that may be excluded from the APR. Remember, just because they don’t show up as part of your APR, does not mean you don’t have to pay them. They may include:
When you purchase the property a document search is conducted to ensure a clean chain of title. To put it in simpler terms, a title search is conducted to make sure that the person selling actually has the legal right to do so. The title fees cover that process as well as insurance to make sure there are no mistakes.
While Washington state does not require you to have an attorney present at your closing, it may be a good idea. Real estate attorneys typically charge less than 500.00 to facilitate a real estate transaction on your behalf. These attorneys have seen lots of closings, understand the documents, and can provide an extra layer of protection for you during the purchasing process.
A notary is an individual licensed by the state to apply a seal to documents signifying an official witness to any signatures. Generally, it is accrued per signature but can vary.
Sometimes a closing agent will asses a document preparation fee. This is separate from the fee charged by your lender and it covers the preparation of all documents related to the closing (there are a lot)
While it’s not generally required in Washington State, a home inspection is one of the cheapest “insurance policies” you can buy as a new homeowner. Licensed professional home inspectors usually charge somewhere between 250 and 500 dollars for an exhaustive inspection and report of the property. They check for all kinds of things from the foundation to the roof and pretty much everything in between. A home inspection may not be required but its the easiest way to get a good idea of what you are buying.
Recording Fees are the amount generally charged by a government agency to register real estate purchases with the county so it becomes part of the public record.
Real estate transfer taxes are assessed by states, counties or municipalities for transferring real property within that territory.
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Independent professional licensed appraisers are employed by the lender to asses the real value of the property so underwriters can ensure the real estate is worth the amount of the loan.
Truth in lending
There are a lot of costs and fees associated with buying a home and it may be a little confusing to understand your APR. In 1968 the Truth In Lending Act was established to promote the informed use of consumer credit. Rather than regulating what kinds of fees can be associated with loaning money, the larger goal of the Truth In Lending Act is to require consistent and thorough disclosure of all costs.
As of October 3, 2015, a form called the Loan Estimate replaced the initial Truth-in-Lending disclosure for most home mortgages. A Closing Disclosure replaced the final Truth-in-Lending disclosure.
The Truth In Lending Act requires APR to be disclosed as a single rate for mortgage loans. It doesn’t matter whether the loan has a single interest rate, variable or discounted variable interest rate. The last page of the document has a “Comparisons” section that shows not details the APR, but how much the loan will cost within the first five years
Truth In Lending / Loan Estimate (so important, you get it twice)
According to the truth in lending act, your mortgage lender is required to provide you with truth in lending Loan Disclosure twice during the home purchase process. The first time happens once you make the initial application. This should provide a detailed look at what you can expect before you sign your life away. The second time you receive the truth in lending disclosure is at the actual closing. Your disclosure will include information about the cost of your mortgage loan, including your annual percentage rate (APR). It is important to review those numbers carefully to make sure there were no unexpected changes.
Whether you are looking to buy, refinance, or just have questions about home-ownership, visit with your trusted home mortgage expert at Sammamish Mortgage today. Let the professionals at Sammamish Mortgage guide you through the process. Family owned and operated for more than 25 years, we know what you value. Let us help you understand the ins and outs of home financing and more. Sammamish Mortgage offers a variety of loan programs including FHA and VA mortgages. Regardless of your situation, we can guide you through the process. Proudly serving Washington State, Oregon, Idaho, and Colorado. Please contact one of our friendly staff members today. We look forward to serving you.
