Bad Credit Mortgage Loans: Understanding Rates, Points, and APR

By Karen Lawson
Mortgage Credit Problems Columnist

When choosing credit card offers, consumers frequently focus on the interest rates. This also applies to bad credit mortgage loans. Don't overlook the upfront costs of getting a new mortgage; it's important to know how and why all mortgage finance charges are applied.

 

Interest Rates: That's not all, Folks!

If you have an adjustable rate mortgage (ARM), your interest rate can increase or decrease according to the terms of your mortgage documents. How rates can change depends on financial markets (mortgage rates are generally based on a published financial index, such as a 1-Year T-Bill) and the terms of your mortgage (for example, what percentage is added to the index to get your mortgage interest rate). This can be complicated; if you're considering an ARM loan, ask the lender to explain exactly how often and by how much your rate can change, and show you what the payment will be. If a lender mentions a specific financial index, find out how you can track it. This information should also be disclosed in writing, and the disclosure should match your lender's explanation.  Bad credit often happens to good people only because they don't take time to fully understand loan terms before signing mortgage documents.

 

You Have a Point…Or Two

"Points" are lender charges to originate a mortgage or improve the terms of your loan. For example, points called "discount points" are used to get you a lower rate. A point is equal to 1% of a mortgage loan amount--for example, 1% of $200,000 is $2000. If you have bad credit, lenders may require points to lend you money at all, due to the risk associated with bad credit. If a lender wants to charge points for bad credit, ask what it would take to reduce or eliminate the points. Alternatives to paying points may include making a larger down payment or accepting a prepayment penalty (which means you have to keep your loan a minimum period of time).

 

APR: A Tool for Comparing Mortgage Loans

APR, which stands for annual percentage rate, is the cost of all up-front charges, points (if applicable), and interest expressed as an interest rate. It allows shoppers to compare identical loans more easily. For example, it would be hard to know if a 5.5% rate with 2 points is a better deal than a 6% loan with no points. Comparing APRs between the two options (as long as both loans are the same type, such as 30-year-fixed-rate mortgages) helps find the better deal (the lower APR).  Federal law requires lenders to provide this information; it will appear on your Truth In Lending (TIL) disclosure. Comparing APRs can help you save on your home loan.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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