Comparing Mortgages by Monthly Payment Alone Is a $50,000 Mistake

Two mortgage offers can have the same monthly payment and differ by $50,000 in total cost. The monthly payment is the number borrowers fixate on. The total cost, including interest over the full term, is the number that actually matters. What to compare A mortgage has at least six variables that affect total cost: Interest rate - the stated annual rate APR - the effective rate including fees and points Loan term - 15, 20, or 30 years Points - upfront fees that buy a lower rate (1 point = 1% of loan) Closing costs - origination, appraisal, title, insurance PMI - private mortgage insurance if down payment is under 20% Two offers might both have $1,800 monthly payments but wildly different compositions of these variables. The APR trap APR (Annual Percentage Rate) was designed to make comparison easy. It rolls the interest rate and certain fees into a single number. In theory, the lowest APR is the best deal. In practice, APR has three problems. First, it assumes you hold the loan to matur