All Rates are Not Alike

The introduction of the APR was an attempt by regulators to make comparisons between loan types and lenders a bit easier and standardized. Why does the APR, or annual percentage rate, make comparison easier? It makes it easier by including all charges that are related to sourcing a home mortgage loan into and expressed as a percentage rate or APR.

So if you are considering buying down your loan rate by paying points, you can see how this will effect the real cost of credit by comparing the APR. Keep in mind though that the savings in paying points can be negated if you terminate your loan early by refinancing or moving to a new location. Good rule of thumb, don't pay points if you are planning to move or refinance your mortgage in the next five years.

Other Low Interest Conundrums

Many people often puzzle over the low interest offered on ARMs as opposed to the slightly higher rates offered with the fixed rate loan. Make no mistake-- that discount you are getting with an adjustable rate ,ortgage is built into the overall higher risk of the loan. With a rising rate environment like we are currently experiencing, the risk is that when the fixed portion of your loan ends you will wind up paying more.

The problem with this is that you will be spending much more money for your loan than if you had gotten the original higher fixed rate home mortgage loan. Not only will the new rate likely be more than that original fixed rate figure but you will also be extending the term of the loan. Extending the term means that many more years your hard earned dollars will go to the lender instead of to yourself.