There are so many different terms within the mortgage world that they all seem to run together. Some of the most easily confused terms are mortgage rates and APRs. Contrary to popular belief, these two terms are not interchangeable. Instead, the differences between them are key to understanding the mortgage process.
What Is a Mortgage Rate?
A mortgage rate refers to the interest rate of your mortgage loan. Essentially, this will be the cost of borrowing the principal amount of the loan that you will pay monthly throughout the loan’s lifetime. Lenders charge you interest to offset the risk that they are taking by lending you the money.
Even though there are both fixed-rate mortgages with interest rates that do not change and adjustable-rate mortgages with interest rates that may change over time, your mortgage interest rate will always be expressed as a percentage.
What Is APR?
On the other hand, APR refers to the “annual percentage rate” and includes your interest rate plus any additional fees and expenses associated with your loan. Since your APR includes your interest rate and other fees, it will always be higher than your initial interest rate.
You can think of APR as the total cost of borrowing the money for your new home. APR typically includes additional rates and fees such as broker fees, discount points, loan origination fees, etc. However, APR can get confusing since different lenders include different fees within APR.
It’s always a good idea to ask for the complete list of each item included within APR to get the total picture before you move forward with a particular lender. For instance, say one lender offers you a seemingly lower APR of 3.5%, while another offers you an APR of 3.8%.
However, upon further inspection, you see that the higher APR includes a whole host of closing costs and fees that the lower one does not. The higher APR of 3.8% may actually end up being cheaper than the lower one at 3.5% when you add it all up.
What’s the Difference Between the Two?
The best way to look at mortgage rate and APR is to consider your mortgage rate as a snapshot of what you will pay monthly, whereas your APR is the complete picture of the total amount you will pay to borrow money to purchase a home.
Additionally, mortgage rates are determined by your credit score and the current mortgage market. On the other hand, APR is determined directly by the lender since they decide what their rates are and which fees they are going to include within it.
What Is a Good Mortgage Rate and APR?
When you apply for a mortgage, you will receive a Loan Estimate document about three days after applying in which you will see your interest rate and APR. You will see these rates again on your Closing Disclosure document about three days before you close on the property.
So now that you know where to find these important numbers, you’re probably wondering how you can even determine what’s a “good” rate and what isn’t. Determining this is easier said than done since these rates are based on a whole host of different factors and tend to change quite frequently -- even by the day.
For instance, back in March of 2021, the average APR for a 30-year fixed-rate mortgage was 2.98%. For a 15-year fixed-rate mortgage, it was 2.51%. However, it’s important to note that these are the averages, and not everyone will qualify for these rates.
For those with a FICO credit score between 620 and 629, the national average mortgage APR was 3.92%.
For those with a FICO credit score between 640 and 659, the national average mortgage APR was 3.4%.
For those with a FICO credit score between 660 and 670, the national average mortgage APR was 2.97%.
For those with a FICO credit score between 680 and 699, the national average mortgage APR was 2.94%.
For those with a FICO credit score between 700 and 759, the national average mortgage APR was 2.58%.
For those with a FICO credit score between 760 and 850, the national average mortgage APR was 2.36%.
As you can see, only those with FICO credit scores above 660 may qualify for these favorable “average” rates above 2.98%.
How to Get the Best Mortgage Rate and APR?
Clearly, your credit score plays a huge role in obtaining the best mortgage rates and APRs. But there’s more to it than that. We will discuss several different steps that you can take to secure the best possible mortgage rate so that you can purchase your dream home.
Know and Improve Your Credit Score
Starting with the basics, you should know your credit score before you start applying for mortgages. If you have a less-than-ideal score, it may make sense for you to spend some time to improve it before applying for a mortgage and receiving a higher interest rate that may end up costing you thousands of dollars more over the lifetime of the loan.
When trying to improve your credit score, make sure that everything is correct on your credit report. If anything is incorrect on the report, you should file a dispute with the credit bureaus. If everything is correct, you should use your credit report to identify the areas that negatively impact your score.
FICO uses five factors to determine your credit score: payment history (35%), credit usage (30%), age of credit accounts (15%), credit mix (10%), and new credit inquiries (10%). Some of these areas will be easier to fix than others.
For instance, there’s not much you can do to address the age of your credit accounts. On the other hand, it’s pretty easy to manage your credit usage -- all you have to do is pay off your accounts to lower your utilization rate. Generally speaking, lenders want to see a credit utilization rate less than 30%, but your end goal should be less than 10%.
You should also keep paying your bills, pay off any other debts, and limit credit inquiries. It may not happen overnight, but you can improve your credit score with patience and diligence to receive a better mortgage rate.
Consider Paying Discount Points
Many lenders allow you to pay more upfront in exchange for a lower interest rate. For instance, you can purchase one point for 1% of the loan amount, lowering your mortgage rate by 0.25%.
For instance, say you received a mortgage rate of 3.5%, but you want to lower your rate to 3.0%. You can pay an additional 2% upfront to purchase two points. The exact cost of these points varies, but for a $200,000 loan, it will cost you $4,000.
While this might seem like a great option in any circumstance, that’s not necessarily the case. Paying more upfront for discount points usually makes the most sense if you’re planning to stay in the home for a long time. On the other hand, if you’re planning on selling and moving in five years, paying extra for discount points doesn’t really make sense.
Shop Around With Multiple Lenders
When it comes to mortgages, it pays to shop around. Instead of settling on a lender after a single application, you should shop around with multiple lenders to secure the best rate.
For instance, the Consumer Financial Protection Bureau found that the average borrower could have saved $9,000 over the 30-year term or more than $300 a year if they had found the lowest rate when applying for their loan. Additionally, NerdWallet found that a borrower who compared five lenders could save more than $400 in interest in the loan’s first 12 months.
While interest rates are important, you should also make sure that your lender is reputable and responsive. After all, you’re going to be working with them for years to come. You should also make sure that your lender is transparent and trustworthy regarding their agreements and disclosures.
Final Thoughts on Mortgage Rates
If you’re looking for a lender that will provide you with favorable interest rates and is easy to work with, look no further than Vaster Capital. At Vaster, we prioritize total transparency, fast closings, and personalized assistance within a simple process. We also focus on flexibility and are able to lend to self-employed borrowers and foreign investors. So feel free to reach out to our lending experts today for more information about our process and loan options!