Base Rate, APR, and Points: How Much Will You Pay for a Mortgage in Brooklyn?
Brooklyn real estate buyers typically do not pay for their purchase of a residential property in cash. In most cases there is a mortgage. In simple terms, a mortgage is a loan used to purchase real estate with the property itself serving as the collateral. The borrower must make monthly payments of principal and interest on the mortgage, otherwise the lender can foreclose on the property, i.e. repossess and sell it to recover the unpaid loan balance.
If you are looking to buy a new home and need to apply for a mortgage, you should first understand some of the basic principles that go into determining how much you will actually pay each month. Three terms that you will often see lenders advertise is a mortgage’s base rate, annual percentage rate (APR), and points. Below is a brief explanation of what these terms mean.
Base Rate
The base rate is the interest rate that a mortgage lender uses to calculate the borrower’s monthly payment. With a fixed rate mortgage, the base rate remains the same throughout the life of the loan. These payments are amortized, which means that your monthly payment will be the same each month, even though the amount of interest you owe decreases over time. In other words, in the early years of the mortgage more of your monthly payment goes to paying interest, while in the later years it will mostly pay off principal.
Annual Percentage Rate
The APR is a second interest rate that is always higher than the base rate. For example, a lender may advertise a 30-year fixed rate mortgage with a base rate of 6.375 percent and an APR of 6.7 percent. So how does the APR differ from the base rate and why is it always higher?
Basically, the APR reflects the total cost of taking out the mortgage. It includes not just the purchase price of the residential property but also a number of mortgage-related costs and fees required by the lender. That’s why the APR is higher than the base rate. In theory, the APR provides you with a more accurate picture of what it will cost to purchase and occupy the home. But the APR can also be misleading, as it assumes the buyer plans to stay in the home for the entire length of the mortgage without making any changes, such as refinancing.
Points
Some lenders offer “points” on their mortgages. A point is an upfront fee paid by the borrower in exchange for a lower interest rate. Each point is equal to one percent of the principal. So if you take out a $900,000 mortgage with one point, you would pay the lender $9,000. Buyers typically take points on a mortgage if they expect to remain in the home long enough to recoup the upfront cost.
Contact a Brooklyn Real Estate Financing and Lending Lawyer
Financing any residential or commercial real estate transaction can be a complex undertaking. That is why it is important to work with an experienced New York City financing and lending lawyer. Contact Yeung & Associates, PLLC, today at 718-889-7568 today to schedule a consultation.