You may have seen interest rates advertised in your newspaper, on TV, or other places that sound appealing to you, but when you talk with your loan agent the rate offered to you is higher... why is this?
The interest rates advertised are usually for the most conservative loans available in terms of lender's perceived risk. The low rates you see advertised usually have no compensation built in for paying closing costs, they are only for borrowers with the highest credit scores, and who can fully document their income and assets. Sometimes they are also for loans that have a shorter loan term, for example 15 years to pay off the loan instead of 30 years. Usually there are very few people who can actually get the advertised rates... so don't feel bad if you're not one of them.
Lenders charge you fees (usually fractions of 1% of the loan amount) for variables in your scenario that increase their perceived risk. These types of variables include giving less documentation to the lender to get your loan, having less than perfect credit scores, the ratio of the amount you want to borrow in relation to the value of the property involved, and many others.
When your Avatara consultant gathers rate quotes for you, they are factoring in the variables that cost you lender fees. So this influences your final interest rate quotes. For example... if you want to buy a home and have no money for a down payment you will pay a slightly higher interest rate because the lender is taking a bigger risk if you default on your loans. After all, they would have costs in foreclosing, plus the property could drop in value due to market conditions... so you pay a little more in interest to get this type of financing.
At Avatara, when we quote rates, we usually will give you options that include whether you wish to buy down the rate, or if conversely you want a rebate from the lender to help pay you closing costs. For more information about how this works click here. We also negotiate with a number of lenders on your behalf, including our preferred lenders, to get you the lowest rates and payments possible.
What is APR anyway? Well, if you're asking this question you are not alone!
APR (annual percentage rate) is found on your Truth-In-Lending Disclosure, along with calculations that show your monthly payments for your new loan(s).
Unlike your actual "note rate" (the interest rate you will actually be paying for the principle you borrow) APR adds your non-recurring closing costs together with your loan principle and calculates a new rate designed to show you how much the closing costs of your loan are costing you monthly over the term of the loan.
For example, if you got a loan for $500,000 at 8% and paid 2 discount points to the lender (each point is 1% of the loan amount, thus $5000 in this case), you would effectively be borrowing $490,000 ($500,000 - $10,000 for the 2 points) but you'd still be paying back $500,000 at 8% over, say, 30 years. In this example your APR would be 8.21%. Another way to define APR is: The effective amount borrowed.