Mortgage broker vs. lender
A mortgage broker is an intermediary who can help you choose the best loan for you. Should you work with a broker or a direct lender?
Valerie Johnston
Buying a home for the first time comes with a lot of excitement — and a lot to learn. When you begin looking at mortgage estimates, you’ll notice these terms: interest rate and APR. These may seem similar, but they have important differences to note. Understanding the distinction between interest rate and APR helps you compare options from lenders as you shop around for a loan.
The interest rate is the amount it costs to borrow money from a lender. It's expressed as a percentage of the loan amount. As you pay off, or amortize, your loan over the loan term, part of your monthly payment will go toward paying interest on the loan.
Many factors affect your interest rate, including the economy, the financial markets, your credit score and your down payment amount. Interest rates can vary widely: In October 1981, the average 30-year fixed rate was over 18%; in October 2021 it dropped below 3%. As of the date of publication, mortgage interest rates remain near historic lows.
APR stands for annual percentage rate. The APR is a broader measure of the cost of borrowing; it includes interest and other fees. This is why your APR will be slightly higher than your interest rate. Sometimes APR is referred to as the “real” cost of your loan. Like an interest rate, APR is given as a percentage.
APR includes the interest rate and other fees associated with the loan, like broker fees, discount points and closing costs.
The APR on a mortgage includes:
Most additional charges in the APR don’t change your monthly payments, which are mainly made up of principal, interest, taxes and insurance. That said, APR does indicate the total amount you spend to get a home loan, so it is a useful metric when comparing offers from different lenders. Keep in mind: If you’re refinancing, you may have the option to roll APR costs into your loan, which makes your monthly payments higher because you’ve increased your principal balance.
There are certain APR fees you can ask your lender to reduce or waive. Depending on the lender, you may have success negotiating the following:
When you’re comparing mortgages, it’s useful to look at both the interest rate and APR. When you apply for a mortgage, the lender is required to provide you with a three-page Loan Estimate that shows both the interest rate and the APR. As you research your options, bear in mind that the loan with the lower rate isn’t always the right option for you.
As an example, consider shopping for a $200,000 loan and receiving two quotes:
At first glance the second option seems best, but it depends on your circumstances. Option two achieves the lower interest rate with more money upfront (in this case $4,000) and an increased APR. If you plan on keeping the loan for a long time, this may be your best choice. However, if you know you’ll only stay in the home for a few years, the first option may actually save you more once the upfront costs are factored in.
You’ll want to compare apples to apples, so look at an itemized list of closing costs for each quote. Ensure all quotes are using the same terms and estimates for insurance and taxes. Be especially careful when adjustable-rate loans are involved; the APR may not take into account the maximum interest rate on the loan.
Some factors that affect mortgage rates, like the federal funds rate set by the Federal Reserve, are beyond your control. But there are certain steps you can personally take to get the lowest possible rates from lenders.
Interest rate and APR (annual percentage rate) are two key parts of mortgage costs, but they aren’t quite the same. The interest rate is the annual cost to borrow money from the lender, while the APR is a broader measure that also includes other fees, like discount points, broker fees, origination fees and many closing costs. When you apply for a mortgage, the lender is required to disclose both. Researching APRs among lenders is a good way to compare the big-picture costs of home loans.
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