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Comparing mortgages with and without points

Q: I'm finding it a little difficult to compare mortgage rates, because some mortgage quotes involve paying points and some do not. How do I make an apples-to-apples comparison?

A: The simplest way is to focus on the Annual Percentage Rate (APR) as opposed to the interest rate. The APR includes the interest rate but also takes any points and fees associated with the loan and puts them on a percentage basis. This will give you a somewhat uniform basis for comparing mortgage quotes that do and do not entail paying points.

Even so, what you get with APR is not quite an apples-to-apples comparison. Two mortgage quotes with identical APRs may entail you paying the same total over the life of the loan, but the fact is that, if one quote requires you to pay points, that means you would have to pay money sooner than with a mortgage loan without points. Since there is a time value to money, in that scenario the mortgage loan without points would represent a better deal for you, even though the APRs are identical.

By way of background, APRs have vastly more significance with fixed-rate mortgages than with adjustable-rate mortgages. One reason is that, while an APR attempts to blend up-front costs into an average, overall rate you'll pay over the life of the mortgage, with an adjustable-rate loan you really have no way of knowing what that rate will actually be because it will fluctuate as mortgage rates change.

The other reason APRs are less significant on adjustable-rate mortgages is that there are other conditions in an adjustable-rate mortgage which may prove every bit as important as the initial rate. These conditions include how frequently the interest rate can reset, how much it can change at any given reset point, and whether there is a maximum increase allowed over the life of the loan. Those are all conditions to be mindful of with an adjustable-rate mortgage.

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