Understanding Your Mortgage - 10/14/09


For Immediate Release
8:00A.M. PT, October 14, 2009
Fredrick J. Bond, SVP/Mortgage Division Manager
805.369.5138
fbond@heritageoaksbank.com

(San Luis Obispo, CA) - Federally-mandated mortgage disclosure forms require lenders to give standardized information to all borrowers. One piece of information which is prominent is the annual percentage rate (APR).

Consumers frequently find APR confusing because it’s not the same as your interest rate. APR also incorporates closing costs into the calculation of your borrowing rate.

“However, APR does not tell the whole story,” notes the Research Institute for Housing America. APR calculations assume the borrower stays with the same loan until it’s paid off.

Yet that’s not the case for most homeowners. It’s more typical for someone to refinance or move and obtain a new loan, rather than holding the same mortgage for 30 years.

A borrowing approach which is ideal for you also could cause the APR to move higher or lower. For instance, you can pay “points” as a fee to cut your interest rate. Or someone in different circumstances may select a higher interest rate in order to purchase with reduced closing fees.

Paying points will lower a mortgage’s APR. But if you stay in your home just a few years, you won’t realize much benefit from paying a fee to reduce your interest rate for three decades.

TAILORED TO YOU

Knowing your goals and personal financial situation are keys to gaining advantageous financing. Someone who believes they’ll be moving in the future may want to get a mortgage whose rate is guaranteed for seven or ten years. You’ll be able to have a lower rate, since the lender won’t have the risk of providing fixed financing over 30 years.

Someone in that situation also should consider ways to avoid upfront costs. Such fees may not seem much if you’ll be staying put for a long time. But if you’ll be moving on in half a dozen years, you don’t want to pay those costs all over again.

On the other hand, a buyer who plans on seeing their pre-school children graduate from the nearby high school could save money by paying points to lower their mortgage rate. Paying less each month for more than a decade would allow your savings to pile up.

Because your financial situation is unique, your mortgage also should reflect that. Selecting a loan based on how low its APR is doesn’t give you adequate information to do so.

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