Annual Percentage Rate: APR is the actual percentage interest rate the borrower pays when all the costs of obtaining credit are included. APR includes points and other lending assessed fees.

Lenders are required to report APR so that borrowers can compare lender quotes and fees. In the past, lenders used to entice borrowers with low rates but then end up charging high fees. APRs protect consumers from predatory pricing.

You should always compare the APR when evaluating lender quotes.

Example of APR:

Borrowed amount: $100,000

Quoted initial rate:
7. 00%

Number of points:
0 points

Term:
360 months

APR: 7.00%

In this example, the APR is the quoted initial rate of 7.00% because no additional fees were included.

Another Example of APR:

Borrowed amount: $100,000

Quoted initial rate:
7. 00%

Number of points:
1 point (equates to 1% of the loan amount)

Term:
360 months

APR: 7.099%

In this example, the APR is greater than the quoted initial rate because points were added to the cost of obtaining the loan. The APR of 7.099% becomes the actual percentage rate after including all points and other lending assessed fees.

Try this True Cost Calculation from Fannie Mae® to calculate rate, points and APR

Effective Interest Rate: The effective interest rate is the interest rate you will pay after deducting qualified interest related expenses from your taxes.

You should discuss tax deductibility with your tax advisor (see tax advisor links).

Example of Effective Tax Rate:

Amount of interest paid during the year: $10,000

APR:
7. 00%

Tax Rate:
28%

Eligible tax deduction: $2800

Effective tax rate:
5.04%

In this example, the actual interest paid after deducting a portion from your taxes is $7200. The effective interest rate now becomes 5.04% for the year that interest rate deductions were taken.

See our effective interest rate table

A point equals 1% of the amount you borrow.
For example:

If you borrow $100,000 and pay 2 points, your "cost" to borrow that money will equal: $2,000.

You have the option to pay the points "up-front" at the time of closing or have the lender subtract the points from the amount they lend you.

Example: if you are borrowing $100,000 and select to subtract 2 points from your loan amount, the lender will take out $2,000 and give you $98,000.

Points can raise your APR.
One point is roughly equivalent to one-eighth raise in your initial rate on a 30-Yr mortgage.

Example: a 30-year mortgage rate at 9% and 2 points is roughly equivalent to an APR of 9.25%.

Under a 15-Yr mortgage term, one point is roughly equivalent to one-sixth raise in your initial rate.

Example: a 15-year mortgage rate at 9% and 2 points is roughly equivalent to an APR of 9.35%.

Is it better to pay points for a lower rate or pay the higher rate?

1. It depends on how long are you going to stay in the home. As a general assumption, it takes about 5-7 years to recoup the cost of points. If you are planning to sell your home within this time frame, it may be better for you not to pay points.
   
   For illustration:
   
   

   Loan amount: $100,000 Term: 30 years Mortgage Loan: 2 points Mortgage Loan: 0 points Rate: 6.50% Payment: $632.07   Cost of Points: $2,000 Rate: 7.00% Payment: $665.30 Monthly Net Increase: $33.23   Recoup Costs: 5 years ($2000 / $33.23 / 12 months) Loan amount: $200,000 Term: 15 years Mortgage Loan: 3 points Mortgage Loan: 0 points Rate: 5.90% Payment: $1,676.93   Cost of Points: $6,000 Rate: 6.60% Payment: $1,753.23 Monthly Net Increase: $76.30   Recoup Costs: 6.5 years ($6000 / $76.30 / 12 months)

   
   
   
2. It depends on the time value of money.
   You need to analyze whether you can get a better return by investing your "points".
   
   You must consider your tax bracket and the investment's ROI vs. the interest rate being charged for your mortgage.
   
   Try this calculation from smartmoney.com: click here

the mortgage underwriter
the mortgage distributor (or marketer)

Mortgage Underwriter:
the mortgage underwriter is the lender of money. They take money from a pool of funds (in most cases, deposit money) and lend it to the homebuying market at a base percentage.

The base percentage includes the cost for using the money and a margin for profit.

Example:*	Cost of Money:	3.50%
	Servicing Costs:	0.75%
	Other Costs:	0.25%
	Profit Margin:	1.50%
	Base Percentage:	6.00%

*This is a sample of deriving base percentage and does reflect the actual numbers of the industry.

But there are additional costs that the lender must incur. These costs include the marketing or distribution costs in getting the loan money to the buying consumer.

Lenders will then add points to the base percentage to cover their marketing and distribution costs.

Mortgage Distributor:
the mortgage distributor is generally the "retailer of the loan" who meets with you to select and finalize your mortgage product.

These distributors can be the mortgage loan officers of the lending institution or the mortgage broker.

The mortgage loan officers
work for the lending institution. They have their offices scattered around the community where you can meet one-on-one to discuss your mortgage needs from the lender they represent.

They are paid a salary and in some cases a commission for every mortgage loan that they originate.

Brokers on the other hand work independently of lending institutions.

They work on your behalf of the borrower to shop among multiple lenders for the best product and price.

These players are usually paid a broker fee by the lender when they originate the loan on the lender's behalf.

Negotiate:
note that points and other originating fees are marketing compensation fees for originating your loan — in other words, it is the "profit" for brokers and lenders.

As an informed mortgage shopper, you are in a position to negotiate these "profits" down if you are in a strong qualifying position for a mortgage loan.

A little profit is better than no profit if the lender knows that you can go with another lender.

Comparing the APR among lenders is an effective way to shop for mortgage loans. But you must compare similar loan products for the same loan amount and terms.

Compare your true lending costs from Fannie Mae:
http://www.mortgagetoolshed.com/

Every lender or broker is required to give you an estimate of its fees. Compare these fees among several lenders. Many of these fees are negotiable: see closing costs

Some lenders will offer lower closing costs for higher up-front points.

When you add it all together, the total cost may be less than a mortgage product with lower up-front points but higher back-end closing costs. These are all negotiating areas with your lender.

Note that your individual situation such as how long you intend to remain in the house and your tax situation (points are tax deductible) may affect your loan comparison.


For more loan comparison information from the US Government:
http://www.pueblo.gsa.gov/cic_text/.../mortb_1.htm

Download this loan comparison worksheet:
http://www.webreader.com/.../mortgage_worksheet.pdf

For Example:
Compare 30-year fixed rate loans for $100,000 and at 8%.

Loan A:
lower up-front points but higher closing costs

2 points ($2,000) and lender closing costs of $1800 = $3800 in costs.

Loan B:
pay more points for lower closing costs

2-1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.

You should ask your lender about lock-in rates.
Lock-ins protect your mortgage interest rate and points from rising while you wait to close on your home