What is the Difference Between an Interest Rate and APR When Buying a Home?

The many costs associated with buying a mortgage often leave new buyer’s heads spinning. Between closing costs, interest rates, and additional fees, how do you stay on top of everything? The more you understand the different terminology of mortgages, the better equipped you’ll be to make smart choices about your money when buying a house. 

One of the most confusing aspects of choosing a mortgage is understanding your interest rate and annual percentage rate (APR). This guide will break down the differences between each so you’ll be ready to find the best mortgage deal


Interest Rates and APR Defined

When you choose to buy a home, you’ll likely get financing from a mortgage lender or bank. The lender generally will pay for a percentage of the loan, and you agree to pay this amount back with interest over a specific period of time. Your interest rate is the amount of interest you’re accruing on your home mortgage each year. 

That means when you pay your mortgage every month, you’re paying a portion of the principal, or the amount you originally borrowed, as well as the interest you’ve accrued for that month. With that in mind, the longer the length of your loan, the lower your monthly payments and the more you’ll pay in interest. 

Your interest rate is not the same as your APR, or annual percentage rate. While we’ve just defined your interest rate as the amount you’ll pay to borrow your mortgage loan, this doesn’t include any other fees or charges that come along with having a mortgage.  

Your APR is both the cost of your loan as well as additional fees. Your APR will include the cost of mortgage insurance, loan originator fees, discount points, and more. That means you don’t want to only look at your interest rate when shopping around for a mortgage. Your APR will give a much clearer picture of how much you’ll owe on a monthly basis. 


How to Compare Mortgage Rates

Now that you understand how interest rates and APR differ, you’re in a better place to compare mortgages to find the best fit for your budget. The best place to find all of this information is on your loan estimate. Your loan estimates from all of your lenders will look the same since it’s a regulated government document. 

You’ll find your loan interest rate under your section for loan terms, and you’ll need to read on further to find your APR under the comparison heading on the third page of your loan estimate document. When deciding two similar loans, it’s a good idea to jump to the APR. This will help you land the best deal. 

In general, APR provides a clearer picture of which lender is charging you more. However, always do your best to research any additional expenses that might not be included in your APR such as property surveys or title insurance. It’s also important to note that APRs on adjustable-rate loans won’t show the maximum interest rate possible, so this could be misleading.  

If you want a lower monthly payment, pay the most attention to the interest rate. If you’re more concerned about the overall cost of your loan, focus more on your APR. Of course, this is not a one-size-fits-all solution. Take all aspects of the mortgage application process seriously to make sure you know what you’re getting yourself into. Your mortgage is likely the biggest financial agreement you’ll ever enter. Don’t take it lightly! 

How Does Home Foreclosure Work?

The world of home foreclosure can be confusing to those new to real estate. Buying a foreclosure is a great way to find a good deal, especially in competitive markets. Home prices are expected to rise 4.3% next year and 3.6% in 2020 which is twice as fast as the speed of inflation. 

Because of this competition, a lot of buyers are interested in foreclosed properties, but it’s not as simple as it seems at first glance. Foreclosed homes belong to the bank, and before this, they belonged to a homeowner who left the home either voluntarily or involuntarily. There are a lot of aspects to foreclosure to consider, from why the seller lost their home to the auction process. 



What Causes Foreclosure?

The first thing to understand is just how the seller went into foreclosure in the first place. Foreclosure is what happens when a homeowner no longer pays their mortgage. It’s a legal process in which the owner forfeits their rights to their property to the bank. 

When people think of foreclosure today, they likely picture the market crash of 2008. During this time, many homeowners walked away from their homes simply because the value dipped so low. Today, however, homes go into foreclosure for a number of reasons. While we refer to the owner of the home as the “homeowner,” it’s important to realize that this term is misleading. Because the homeowner has a mortgage, they’re actually a “borrower.” Most mortgages are considered “secured” loans, and that means the lender can recover a portion of the debt by seizing the property and reselling it. 



Foreclosure Process

The foreclosure process is lengthier than most buyers think. After the borrower fails to make timely payments on their mortgage for 3-6 months, they’re given public notice. This is technically called a Notice of Default (NOD) in many states. This notice lets the borrower know they’re in danger of losing their rights to the property. 


After the NOD from the lender, the borrower enters a period called pre-foreclosure. This can last up to 120 days, and this is when the borrower will attempt to find an arrangement with the lender. They might choose to pay the amount owed or opt for a short sale. A short sale is the sale of a home for an amount that is less than the unpaid mortgage. 


Many home investors actually prefer to purchase homes during the short sale before the foreclosure proceedings are final. However, if there’s no agreement reached between the lender and the borrower, the foreclosure continues into an auction. A foreclosure auction is also known as a Trustee Sale, and the home is auctioned off to the highest bidder for a cash payment. 


It’s important to note that besides needing to purchase auctioned properties in cash, buyers also must purchase them “as is.” This means there are no inspections allowed before making an offer. Because there’s no way to assess the property, it’s important to be aware of risks like structural or interior damage. 


Finally, if the home is not sold at the auction, the lender reclaims ownership. This is called a bank-owned property or REO (real estate owned). These home are then re-sold through a local real estate agent or through the open market. They might even be sold through a liquidation auction. 



Real Estate Foreclosures

While real estate foreclosures can be a reliable way to get a steep discount on a home purchase, it’s a complicated and often risky process. It’s in the buyers best interest to find a real estate agent who specializes in auctioned and foreclosed properties to help navigate these homes. 


After the auction process, banks often sell foreclosures in bulk. This means the lender will package several properties into one transaction and sell them all at once. This can offer an even more significant discount. The real picture of home foreclosure is often an ugly one, and it’s important to take this process seriously as a buyer. 

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