Mortgage rates: lower cost or lower APR?  You decide which is right for you

Why the lowest APR may not be the best mortgage loan for your home loan

Mortgage lenders vying for your loan may tell you they have the lowest APR, but is this good for you or for them? "How do you compare mortgage rates?" is the second thing you should be asking yourself when you consider homes for sale, a mortgage refinance, or investment property.

The first thing is to know your ownership plan. How long do you intend to hold on to the property and how long do you plan to hold on to the home mortgage loan? This matters because your personal context affects how you should be comparing mortgage interest rates.

To help you put this into perspective, according to the Philadelphia Fed, the average tenure in a house is from 5 - 7 years. According to Freddie Mac, the average home loan had a lifespan of 2.82 years.

Which side of average do you expect to fall on? Are you transferred frequently or are just out of college on the fast track at work and beginning a family? Then maybe you are likely to move sooner than average. Or, perhaps you are very steady and expect to stay in the home “forever”. My father bought his home in his early 30’s and been in the home now for 44 years.

To understand why this matters, see the chart below. It shows two different loans, each at $417,000, but one with a higher interest rate (5.25%) and higher APR (5.25%) compared against the other loan that has extra loan fees and been “bought down” to have a much lower interest rate (4.5%) and also has a lower APR (4.92%).

In the early years of the loans, the lower interest rate actually costs the homeowner more money, because the borrower had to pay additional expenses to reduce the mortgage rate. But, over time, that lower APR can result in saving tens-of-thousands of dollars. What should matter to you here is how long is it until that cross-over and how long will you own the loan. The exact transition point will vary with the difference between the interest rates and the additional closing costs to get the lower rate.

You cannot simply look for the lowest APR or for the lowest cost mortgage. You must take into consideration your ownership plans and then determine which best mortgage based on the loan that best fits your needs. You can freely compare different loan scenarios at the Finest Expert Mortgage Center - mortgage rates for your home loan, free tools: mortgage calculator, compare loans, and amortization schedule.

Yes, the loan with the lower APR can save you money in the long run, but, the question is whether or not you be around to reap that reward. By the way, inflation is not taken into account, which would reduce or negate the apparent savings of the lower APR.