The “APR,” or “annual percentage rate” is one factor you’ll want to consider when you’re evaluating different loan products. But when you’re comparing APRs, make sure you’re comparing apples to apples.
Because you’ll be looking at two basic kinds of loans:
- Fixed-rate loans, where your payment stays the same for the entire life of the loan.
- Adjustable-rate mortgages (ARMs), where the rate stays fixed initially, then fluctuates based on market interest rates.
There are advantages and disadvantages to both types of loans. But when it comes to comparing the APR, the important thing to keep in mind is that the it follows a different formula for an ARM than it does for a fixed-rate loan
The APR on an ARM is calculated by looking at your “fully indexed rate,” or the interest rate you would pay if the loan adjusted today. So if you have a five-year ARM, the APR isn’t based on what you pay for the first five years of your loan, but on what you’d pay in five years if the index stays the same as it is now.
A qualified mortgage professional should be able to answer any questions you have about the loan process.