When you get a mortgage, there are three important terms for you to remember.
- Interest Rates
- Points
- APR
I’ve combined these three terms here because they’re related, and you’ll 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 you 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 to 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: I want to tell you about a funny word – it’s one of those words that doesn’t mean what you might think it means when you hear it. (Like when the waiter at the restaurant asks you if you would like your “check,” and somehow you know 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 1% 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’ll tell you about the third term and how it relates to the first two.
APR: “APR” stands for “Annual Percentage Rate.” That sounds friendly, too, doesn’t it?
The APR is what you get when you add the interest rate, the points, and all of the other fees together and then calculate what the loan will cost you each year, based on all of the fees added together. Use the APR to compare two or three mortgages. A higher APR means that the mortgage is more expensive because the costs associated with the mortgage are higher.
