When you stop by your local bank branch to apply for any kind of credit – whether it’s a home mortgage, a credit card, a car loan, or a personal loan – it’s important to know just how much it costs to secure and service that loan.
The money you pay on a car loan or mortgage includes more than just interest. There are often fees associated with the loan, such as an application fee, a processing fee, the cost of a credit report, and other costs that may be added to the interest rate you pay.
In order to understand the actual cost of borrowing money, start by looking at the loan’s Annual Percentage Rate – APR –and talk to your bank’s loan officer for the facts and figures.
What Is An Annual Percentage Rate?
The APR of a loan is typically higher than the interest rate alone. Why? Because the annual percentage rate on a loan includes some of the fees associated with the loan.
For example, the interest rate (the rate) on a home credit line might be 4.23%, but the annual percentage rate (APR) on the same loan may total 4.98% when some of the fees associated with the loan are factored into your monthly payment.
Different lenders charge different interest rates and different fees. That’s why most consumers look at the annual percentage rates of different loans to gain a more accurate picture of just what a loan will cost.
However, as a smart consumer, it’s also important to note that not all fees will necessarily be rolled into the loan itself. In addition, some fees are included with each payment you make, but other fees are paid up front. Your bank’s loan officer will be happy to detail all fees and charges at the time you apply for your loan. Just ask.
What Costs are Included in the APR?
Which fees are calculated as part of the APR depends on the lender’s terms and the type of credit you receive. For example, when you secure a credit card, you’re charged interest on your outstanding balance. However, the APR you pay may also include processing fees, transaction fees, an annual flat fee, and other costs associated with the use of the credit card.
However, the APR does not include late fees, because the bank cannot know whether, or how often, you may incur those fees. Your credit card APR may not include an application fee, if your bank charges one. In other words, not all costs associated with a credit card are factored into the APR you pay on your purchases.
In the case of home mortgages, which fees are factored into your APR and which are collected in other ways, can be explained by your bank’s loan representative.
Typically, the annual percentage rate (APR) paid on a home mortgage is calculated to include:
- private mortgage insurance
- mortgage broker fees
- application fees
- origination points (a percentage of the loan principal)
- discount points (up-front fees to receive a lower interest rate, usually paid at the house closing)
- attorney or closing agent’s fees
- fees associated with processing and underwriting the loan
Fees that are not typically factored in to the annual percentage rate (APR) but are fees paid at the time the mortgage loan closes include:
- title insurance and costs
- appraisal fees
- credit report costs
- notary fees
- home inspection costs
- recording fees required by county authorities
Be sure to discuss your bank’s fee structure when inquiring about mortgage loans and other types of credit.
Getting the Right Loan for You
Start by contacting your bank for information on loan opportunities. Today’s banks offer a variety of loan options – 15-year or 30-year fixed rate mortgages, , and variable rate mortgage loans commonly referred to as Adjustable Rate Mortgages (ARM). Each type of loan has different terms that are calculated to determine the annual percentage rate you pay on the money you borrow.
Review all loan documents carefully to understand the bank’s fee structure and how the bank’s APR on your loan is calculated. Together, you and your bank’s loan officer can select a loan option best suited for your situation.
For more information about getting a loan* from Nevada State Bank, drop in at any branch, visit nsbank.com or call 800-727-4743.
*Credit approval required. Terms, conditions, and restrictions apply.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.
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