When comparing mortgage loans, your definition of “best” come into play – do you want the lowest cost, or the lowest interest rate? In general, the lower the rate, the higher the costs. How do you compare loans with different costs and rates? Suppose you’ve got two offers for a $200,000 home loan. One loan has a 4.0 percent interest rate and costs nothing. The other has a 3.75 percent rate but costs $5,000. Which is the better deal?
The APR incorporates both the loan’s interest rate and its costs, and is useful for comparing loans of the same type (you cannot compare a 30-year loan to a 15-year loan, or a fixed loan to an ARM) with different rates and costs. In this case, the first loan’s APR is the same as its advertised rate, because there are no costs. The second loan has a lower APR of 3.952 percent.
Keep in mind that your loan’s interest rate is not guaranteed until you actually lock it in. It’s a good idea to compare mortgage rates one last time before locking your loan and committing to your lender.