How Do You Accurately
While every home loan comes with a quoted interest rate attached to it, borrowers usually compare loans based on the quoted interest rate and then lean heavily toward the one that has the lowest quoted rate.
Logically, to get such mortgage loans, borrowers must compare interest rates before they can select the most ideal one for their circumstances.
In the process, they are met with two confusing terms, namely: the mortgage comparison rate and interest rate comparison when they try to compare loans.
So, what do the two expressions mean and how can they help home buyers to get the best deal on their mortgage?
What Is A Comparison Rate?
It is the overall rate charged on a loan and it will include the interest rate, fees and all charges pertaining to the loan over the life of the mortgage.
Also sometimes called the True Rate, and often expressed as a single percentage, the comparison rate gives the actual cost over the life of the loan and helps consumers to make the right decisions based on real cost considerations.
Usually, lending laws obligate lenders to publish the comparison rates of their loans when they undertake loan interest rate advertisements.
Nevertheless, even with the comparison rate publications, many borrowers rarely examine the loan beyond the advertised interest rate and don’t take into consideration the other costs of their mortgage loans, such as fees and extra charges, when they do an interest rate comparison.
This is important, because the lender deducts all fees and charges directly from the customer’s loan account and immediately the interest rate clock starts adding up on those new charges.
What Does Compare Interest
Rates Really Mean?
Comparing interest rates usually means to evaluate and contrast different advertised interest rates on various home loans.
Unfortunately, the advertised interest rate does not include initial set-up fees, ongoing fees and other charges that constitute the overall costs of the home loan.
Therefore, comparing home loans by just evaluating the advertised interest rates can be deceptive and can result in choosing a loan that looks pretty inexpensive but which could be costly when all the charges are factored in.
Why Be Concerned About
The Comparison Rate?
Even though borrowers rarely ask themselves the question, what is a comparison rate, those who truly want to get inexpensive and convenient home loans must know the answer to this question.
In fact, they must learn to compare loans not by the loan interest rate but by the loan comparison rate. By using the comparison rates, borrowers can reliably know the overall costs of every loan on offer, including loan approval fees, establishment fees, ongoing fees and upfront, and to make the right choices.
a. The term of the loan;
b. The amount of the loan;
c. The interest rate on the loan;
d. The loan repayment frequency; and
e. All charges and fees associated with the loan.
Indeed, the comparison rate is a comprehensive account of all the critical factors that determine the total cost of a home loan.
However, when comparing the costs of different loans, it is prudent to dig deeper than the comparison rate by examining every single feature of each loan.
That way, a clearer picture and insight into all possible combinations of the terms and amounts of the loans can be deeply appreciated.
For instance, if a loan advertisement reads: comparison rate 5.28% (calculated using a loan of $150,000 for 25 years), variable interest rate 4.95%; it presents a loan interest rate which is slightly lower than the indicated comparison rate in order to illustrate that the true (comparison) rate has factored in other critical costs.
Moreover, the comparison rate of 5.28% given on the loan is only the true cost of that particular loan and would completely change in the case of a different loan size such as $400, 000, or a different loan term, such as 30 years.
Likewise, borrowers should not be confused by comparison rates for fixed loans, such as a comparison rate of 5.24% for a 4.75% fixed interest rate.
In this latter case, the comparison rate has been based on the true full term of the fixed loan, often 30 years, and so it should not mislead the borrower.
Items Excluded From The
While it is invaluable in any mortgage comparison, the comparison rate is not absolute, and typically excludes a number of fees and charges.
The fees and charges excluded in the comparison rate include:
1. Early termination fees like fixed-rate loan break costs
2. Government and statutory fees, which are typically standard regardless of the lender or the type of loan
3. Charges or fees that are based on future occurrence, such as re-draw fees or any penalty fees.
Professional Help Pays When
You Want To Compare Loans
Finally, to evaluate and scrutinize home loans properly, it is prudent to consider all aspects of the loans (features and benefits) instead of dwelling on what the comparison rate alone is.
As indicated earlier, the so called true rate may not include all factors that determine the eventual cost of a loan.
For instance, by excluding attractive benefits such as flexible repayment periods, the option to make extra repayments, 100% offset account and re-draw, the comparison rate falls short of giving an all-embracing picture on which to base mortgage loan comparisons and choices on.
Nevertheless, it is more reliable than simply using the loan interest rate.
Seeking out the help of a professional mortgage broker can be an immense advantage when you are trying to compare loans.