Mortgage Interest Rate vs APR

Mortgage interest rate is the advertised cost of borrowing the principal, while the Annual Percentage Rate (APR) is the overall cost of borrowing the money (including the mortgage interest rate the lender charges you). The factors that affect interest rates and APR are different. An interest rate could increase or decrease depending on the lender, market condition, your credit score and the amount of your down payment. APR, on the other hand, could increase or decrease depending on broker fees, closing costs, discount points and any other fees that you need to pay for processing the loan.

Home Equity Explained

Home equity is the value of the home that you truly own (versus the amount owed to the lender). For example, if a person buys a home with a fair market value of $300,000 and makes a 20% down payment, the buyer has a $60,000 worth of home equity (because $60,000 is 20% of $300,000). Aside from the down payment and the amount repaid over time, there are other factors that could affect home equity. Improving your home with renovations and paying extra money towards your loan’s principal both increase your equity, while current property prices in your area and other market forces can help or harm the equity of your home.

Why am I paying so much Interest?

You may notice that you pay more of your loan’s interest than the principal (borrowed amount) in the first years of your loan. Though your monthly payment doesn’t change, over time the portion of your payment that goes toward interest will gradually decrease, and the portion repaying the principal will increase. Adding a small amount to your monthly payment, applied to the principal, can save you money in the long run. Fortunately, you can deduct that mortgage interest on your income taxes (if you itemize when you file)!

How is My Home Value Estimate calculated?

The My Home Value Estimate graph takes your home’s original purchase price, adjusts the amount dynamically for inflation over time, and compares this with MLS data on recently sold comparable homes in your area. (MLS = Multiple Listing Service used by real estate agents.) This estimate doesn’t include values for any improvements you may have done. It is not an appraisal but a computer algorithm, and a more accurate Fair Market Value Assessment can be done with a professional who is more familiar with your neighborhood.

add to Your Monthly Payment

If you’re planning to stay in your home for a long time, you may want to pay a little extra each month toward your loan principal in order to reduce the total amount of interest you owe over time. (Remember, the amount of interest you pay is based off of your principal balance.) Make sure your mortgage doesn’t have prepayment penalties (most don’t) and that you specify that the extra money is to be applied to your mortgage principal when you pay. Depending on your circumstances, it may be better to pay down other high-interest debts first.

Refinance Basics

Refinancing your mortgage could be beneficial in several ways including getting a much lower interest rate (meaning lower monthly payments), mortgage insurance elimination, shortening the mortgage term (so you can pay off your loan sooner), or even changing an adjustable-rate mortgage mortgage into a fixed-rate mortgage. Depending on your loan size, closing costs could be around 2–6% of your total loan amount. If you have a rate of 4%+, or you can lower your current rate by 1%+, you should talk to your Loan Advisor about your potential savings. Please note: If a lender offers you a “no-closing cost refinance,” this means you don’t have to pay upfront fees when you refinance your loan, but the lender will either charge you a higher loan interest rate or it will just be added to your principal instead. Learn more about typical mortgage refinance fees.

Should You Refinance?

The first thing you should determine before proceeding with a mortgage refinance: How long do you want to stay in your current home? If you’re improving a house in order to “flip” and sell it in the short term, you could benefit from an ARM (Adjustable Rate Mortgage). If you can sell the house before the rate adjusts upward, your payments will be less than a conventional loan. Despite the enticing low introductory rate, the ARM is not a wise choice for living within a budget because the rate changes cannot be predicted. If you’re planning to stay in your current home for the next five years or so, you could save quite a bit by getting a lower rate, or pay less interest by shortening your loan’s term. Just like your original mortgage, you’ll pay closing costs that run 2–6% of the loan principal. For example, if your new loan saves you $192 per month and your closing costs were $11,000, it would take almost 5 years to recoup (58 payments). If you have a rate at or above 4% or can lower your current rate by 1% or more, it likely makes sense for you to talk to your Loan Advisor to go over the potential savings. If a lender offers you a “no-closing cost refinance,” this means you don’t have to pay upfront fees when you refinance your loan, but the lender will either charge you a higher loan interest rate or it will just be added to your principal instead.

Cash-Out Refinance Work?

A cash-out refinance allows for you to refinance your current loan and borrow money all in the same transaction. The new loan replaces your existing mortgage with a larger one, based on your home’s fair market value—allowing you to pocket the remaining amount. This type of refinancing is worth considering if you have a good credit score, a low debt-to-income ratio, and you’ve paid down at least 20% of your original loan. Funding a college education, debt consolidation, and major home renovation projects are just a few of the ways to utilize your home equity. Making “substantial” home improvements using a cash-out refinance could even lead to tax breaks. Plus, you’ll eventually recoup your closing costs if you don’t sell your home anytime soon.

Stand-Alone Second Mortgage

Instead of refinancing, you can also tap into your home’s accumulated equity with a stand-alone second mortgage. There are two options then for people who want to do a stand-alone second mortgage. Either they can do a home equity loan or a home equity line of credit (HELOC). For both of these options, the second mortgage is financed by the equity in their home. The difference between these two lies in the interest rates and how money is dispersed. The home equity loan is traditionally a closed-end loan, meaning interest is charged at a fixed rate with all of the loan proceeds disbursed to you in one lump payment. A HELOC is a line of credit for which you can determine how much you want to borrow, and interest is charged at a variable rate, like a credit card. The rates are usually higher for a second mortgage than your first, as these loans are typically for smaller amounts and are riskier for the lender.