Today, very few people have the financial capacity to buy real estate for cash, so one of the options is to go to financial institutions and apply for a mortgage. But this can be a really confusing process if the person is not familiar with all the terms and abbreviations present in this type of loan, for example, the APR.
This can be difficult when choosing the best mortgage for each case, but there is nothing to worry about. I will explain to you what the APR is and how it can help you choose correctly.
What is APR
First, it is important to know what "APR" means. It is the abbreviation for Annual Equivalent Rate. What does it mean? It refers to a percentage that is calculated through a mathematical formula, and includes elements such as the TIN or nominal interest rate, the frequency of payments and commissions.
So the APR would be the real annual cost of the mortgage. By law, all banks in Spain must inform applicants for these loans of the equivalent annual rate, since it is a highly useful indicator when buying the different offers.
Many confuse this percentage with the monthly interest paid to the financial institution, but it must be clarified that it is not the same. The money paid to the bank each month is the fixed percentage agreed to repay the loan, which includes interest. This is known as TIN or Nominal Interest Rate , and unlike the APR, it excludes commissions and other expenses.
What is it for?
This annual percentage indicates what the real cost of the loan will be and, since all banks must inform their potential clients, it is used to compare each of the available offers . Thus, making a decision is a little easier thanks to this guide.
It is important to note that this is an approximate reference, since the percentage will vary every year depending on the interest rates that comprise it. It would be a more useful index in the case of fixed interest loans.
How can you help me choose a mortgage?
Logically, the lower the APR, the cheaper the mortgage. However, it is important to know if the interest applied to the loan is variable or fixed, since, as mentioned above, if it is variable, the behavior of the equivalent annual rate cannot be determined with certainty.
If that's the case, this percentage is only used for informational purposes and will vary each year. Yes, it is an indication that is useful, but it is important to analyze all the elements to make sure you get the best possible offer, the one that suits the customer's needs and ability to pay.
Is it the only indicative that I must take into account?
Although the equivalent annual rate is useful to compare the different mortgages offered by financial institutions, it is not the only element to take into account , since there are many factors involved when it comes to loans. The terms, commissions, cancellation penalties, contracted financial products, net income and initial savings are just a few.
Analyzing all of these elements is the best way to determine if the loan is beneficial. However, apart from the equivalent annual rate, it is also important to understand the following concepts:
- Euribor: it is an index used by most banks in Spain to calculate the interest rate on loans. It is the abbreviation for Euro Interbank Offered Rate and is published daily by the Bank of Spain, although, in the case of mortgages, the annual rate is taken as a reference. Since 2016, the Euro Interbank Offered Rate has been negative, something that is an advantage for mortgages.
- TINI: also known as the Initial Nominal Interest Rate, it is the initial commission applied to the credit. This usually lasts a period of two years and, once it expires, the interest linked to the Euro Interbank Offered Rate is applied, which is lower. Loans that do not include this type of commission are much better, however, due to the fall of the Euribor, almost all banks include it.
- Spread: once the initial nominal interest rate expires, the spread is applied together with the Euribor to calculate the price of the loan. Each financial institution applies a different differential, and this can decrease considerably if the mortgager has contracted other financial products such as credit cards or insurance.
If you want to know more about this topic, we have a complete guide on mortgage expenses where we explain what they are and what each one consists of. Indispensable before hiring a mortgage.
In summary, when choosing a mortgage, the APR is of great help, since it reveals the real annual cost , including all the fees and expenses involved. However, it is not the only indication that should be taken into account when making a decision.
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