Points, APR, Interest Rates and Bad Credit Mortgages
Whether you’re applying for a credit card or a bad credit mortgage, there’s more to focus on than the interest rate. While important, the interest rate is just one of several up front fees bad credit mortgage lenders may impose.
More on interest rates
The interest rate on a fixed loan does not change over the loan term. But that’s not the way it is with adjustable rate mortgages or ARMs. With this type of loan product, interest rates adjust upwards or down multiple times over the loan term. How often and by how much the interest rate increases or decreases will be disclosed in the mortgage documents. But even though this is explained, rate adjustments still catch many borrowers by surprise.
Usually the interest rate on an ARM is calculated as a percentage added onto a particular published index such as the 1-year T-bill. So the first thing you want to find out is the index to which the ARM is tied. Then learn how you can track it. Always make certain that the written disclosure of rate adjustments coincides with the verbal explanation given by your lender. If there’s a discrepancy, ask for further explanation. If you don’t ask and sign the loan documents anyway, you may find you’re unable to afford your mortgage once rates adjust. If you miss payments or make late payments, your credit will get worse than it already is.
Understanding Points
Points are a bad credit mortgage lender’s way of ensuring a profit on your loan. Equivalent to 1% of the amount you plan to borrow, a few points can quickly add up to a few thousand dollars due at closing. For example, two points on a $150,000 loan is a whopping $3,000!
Points are usually charged in exchange for a lower interest rate. But when it comes to bad credit mortgages, lenders frequently charge points just for approving your loan. Charging points is just one way lenders reduce their exposure to risk. Remember too that points are negotiable. If your lender wants to charge points, always ask if there is anything you can do to eliminate or reduce them. Some lenders will accept a bigger down payment. Others may impose a pre-payment penalty. Some will do both, plus charge a higher interest rate. If the concept of points confuses you, take time to learn more about them before agreeing to a loan. The extra effort can save you money.
Calculating APR
The APR or Annual Percentage Rate is not the same as your interest rate. It is a combination of lender-imposed fees, calculated on an annual basis that is expressed as an interest rate. The interest rate is just one of the fees included in its calculation. Also included are points and other up-front fees. Assuming you are obtaining multiple quotes for similar mortgage products, the APR is one way you can determine which lender is offering the lowest cost mortgage. For example, it’s difficult to know if a lower interest rate plus a few points is a better deal than an offer of a higher interest rate without any points. Looking at the APR helps figure this out. Federal law requires lenders to provide mortgage applicants with a Truth in Lending disclosure form that includes all of the costs the lender plans to charge.