Now that you are armed with your qualification information and your fixed rate loan information, you can begin making comparisons with the different types of adjustable rate loans. Before getting into specifics, you should be aware of the value of the annual percentage rate (APR). You may have noticed that you have not been asked to consider it. The APR is the interest rate plus certain costs, such as points, expressed as a percentage.
Example: Look at a 6% loan with one point and no fees for one year. Since a point is 1%, you can see that the APR would be 7%, which is the interest rate plus the point. (It is slightly less, but close.) The same interest rate and point with a change in the term from one year to five years changes the APR to 6.415%. At thirty years, the APR is 6.093%.
You can see the problem. About 5% of all thirty-year loans last for thirty years. The percentage is probably smaller now after the wave of refinancing over the last few years. Basing your borrowing decisions on the APR is assuming that you will keep your loan for its entire term. It hardly ever happens with thirty-year loans. If you are getting a short-term loan that you intend to keep for its full term, the APR is a very valuable tool.
The requirement that the APR be disclosed was especially helpful for loans for cars and appliances. It alerted shoppers to the use of add-on loans, in which interest was figured so that a 6% interest rate could actually cost the borrower 12%. These practices are not used in home mortgages. The APR for long-term mortgage loans is much less useful than figuring out break-even dates.