One of the most important parts of your mortgage loan estimate is the annual percentage rate, or APR.
This number calculates the yearly cost to borrow while accounting for both your interest rate and lender fees. Find out how APR works and how to get a good one during your homebuying process.
What’s considered a good APR for a home loan
You can get a sense of what a good APR for a home loan is based on national averages. Freddie Mac, a government-sponsored enterprise that buys mortgages from lenders, publishes weekly averages for 30-year and 15-year fixed rate mortgages.
Many lenders also publish their average mortgage rates online. Just be sure to read the fine print to see what factors were used to determine that rate, such as credit score and rate discounts. That way, you can see if your situation would put you in the ballpark for that lender’s advertised rate.
Mortgage interest rate vs. APR
When you’re shopping for a mortgage lender and receive a loan estimate, you’ll receive a quote for both your flat interest rate and your APR.
The interest rate will be lower because it only includes the amount charged on your mortgage balance. That’s the number lenders use when calculating your monthly payment.
But the APR also reflects the cost of lender fees, such as:
- Mortgage insurance
- Origination fees
- Closing costs
- Discount points
Lenders are required by the Federal Truth in Lending Act to share APR rates with you to help you compare mortgage offers.
For instance, one lender may offer a lower interest rate but higher upfront fees, while another may have a higher rate and lower fees. This gives you a better comparison point for each loan option’s total cost.
Factors impacting a home loan APR
As you search for a good APR on a home loan, understand what lenders assess when determining your rate offer.
- Credit score: A higher credit score indicates that you’re more likely to make mortgage payments on time, so you may qualify for a lower rate.
- Debt-to-income ratio: This number compares your monthly income to your monthly debt payments (including the mortgage you’re applying for). A higher DTI could signal risk and result in a higher rate.
- Down payment: Similarly, making a larger down payment could lower your APR because you’re more financially invested in the home.
- Loan type: Your rate will also vary depending on whether you choose a fixed or adjustable rate mortgage. The home loan program also matters whether it’s a conventional or government loan.
- Loan term: A shorter loan term usually comes with a better rate, saving you money over time.
- Lender fees: These fees are typically paid as closing costs but are included in the APR to help you compare offers. Fees may include origination fees, appraisal fees, title insurance, and more.
Some of these factors depend on the borrower’s financial profile, while others vary by lender. That’s why getting multiple quotes is important to ensure you get the best APR for your home loan.
4 ways to get the best mortgage APR
Set yourself up for a good home loan APR with the following strategies. Some take time before the home-buying process, while others can help as you compare loan options.
Pay down revolving debt
High-interest debt has a big impact on your credit score. In fact, FICO’s “amounts owed” category accounts for 30% of your credit score.
Plus, your monthly debt payments impact your debt-to-income ratio. The more you owe, the higher your rate will be.
If you’re in the early stages of preparing to buy a home, it may be worth focusing some energy on lowering those outstanding balances to qualify for a better APR.
Improve your credit score
Lowering your debt balances can help your “amounts owed” category but there are a few other ways to improve your credit in the months leading up to buying a home.
First, make sure your credit report is accurate. Also, be sure to pay all your bills on time, particularly those reported to the credit bureaus.
Finally, don’t take out any new debt (including credit cards) until after you’ve closed on your home.
Compare lender fees
APR includes both the interest rate and lender fees. Whether you’re getting a formal or informal lender quote, consider all the fees to ensure you understand the loan’s true cost.
Consider discount points
Getting a discount point helps you get a lower interest rate by paying the lender extra cash up front. One discount point usually equates to 1% of your home loan and typically gives a 0.25% discount on your interest rate.
How to choose the best mortgage for your new home
As you evaluate your home loan options, there are a number of factors to consider in addition to the APR. Compare loan estimates and pay close attention to details such as:
- Interest rate / APR
- Monthly payment
- Estimated taxes and insurance
- Prepayment penalties
- Closing costs
- Mortgage insurance
Carefully review the information provided, and don’t hesitate to call the lender and ask for clarification if you don’t understand something in your loan estimate.
Read more: Buying a Home for the First Time: What You Need to Know
Find the best APR for your home loan
Everyone has different goals when buying a house, whether it’s paying as little in interest as possible, saving as much cash as possible, or keeping monthly payments low. The impact of the home loan’s APR and other costs also depends on how long you stay in the home.
As you compare mortgage APRs, talk with your lender or other trusted financial professional to help determine the most crucial factors as you work towards your personal and financial goals.