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Bad Credit Mortgages: Interest Rates and APR Explained

By Gabriel Traverso
Mortgage Credit Problems Columnist


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If you have bad credit it is even more important that you know about the mortgage business. You'll be better equipped to make a good decision on the best home loan for you. Take the time to understand home loan terminology to help you find the best deal.

What is the Difference between an Interest Rate and an APR?

This is where things get confusing for some bad credit borrowers. The interest rate is a charge against the loan expressed as a percentage. The annual percentage rate, or APR, is a calculation that includes the total annual cost of the loan. It includes the stated interest rate as well as fees and points charged on the mortgage. As a result the APR will be higher than the interest rate you're quoted on your home loan.

Bad Credit Mortgage Shopping: Making Comparisons

It is important to shop around for your mortgage. Don't take the first offer you're given without checking around--it might not be the best deal you can get. When you're comparing home loans it's important to not only compare the interest rate but also the APR. Since the APR includes points and fees it's also important that you compare the closing costs.

How Long Will You Have That Home Loan?

Bad credit borrowers should be planning on improving their credit ratings over the next couple of years and refinancing into a better loan. So paying to buy down the rate on a thirty year loan probably makes little sense. Compare APRs and costs, but if the APRs are close go with the loan that costs less. And make sure that there won't be a prepayment penalty lurking when you have repaired your credit and want to refinance.

You have bad credit now but with time and work you won't always. Part of your credit rebuilding and financial planning should include a mortgage that you can afford, a debt load you can manage, a savings plan you will stick with, and a smart refinance in the future.

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