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Even a fraction of a percentage difference in APR can add up to tens of thousands over the life of a 30-year loan. Compare average market rates to make sure you’re getting the best deal.
When you borrow money to finance the purchase of a home, banks don’t just hand the funds out for free. Not only will you have to pay back the money you borrow, but you’ll also have to repay the interest that accumulates on that principal amount.
Your lender sets the rate at which interest accumulates on the money you borrow. There can be substantial interest rate differences from one lender to the next, and they have a huge impact on the overall cost of your mortgage. Comparing the offered interest rate to the national average can help you quickly weed out the unfavorable options.
Even a slight variation in APR can add up to tens of thousands of dollars over the life of a mortgage. For example, let’s consider a $500,000 home loan with principal and interest payments and a loan term of 25 years. The table below shows the overall cost of this loan with an interest rate of 3.75% APR and 4.00% APR.
Mortgage A | Mortgage B | |
---|---|---|
Interest rate | 4.00% APR | 3.75% APR |
Loan amount | $500,000 | $500,000 |
Monthly payment | $2,639.18 | $2,570.66 |
Total cost of loan | $791,755.26 | $771,196.80 |
Total interest paid | $291,755.26 | $271,196.80 |
The 0.25% decrease in interest rate on Mortgage B adds up to over $20,000 saved over the life of the loan.
While interest rates are undoubtedly important, they’re not the only factor that determines whether a home loan meets your needs. Other issues to consider include:
Even a small difference in interest rate can have a big impact on how much your mortgage costs. Compare your options to find a lender with an APR, and other features, you’re happy with.
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