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Is the lower home equity rate still cheaper after fees and term?
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I’m comparing two home equity loan offers for a proposed **$60,000 fixed-rate loan** to fund home improvements. I expect to keep the loan for about **five years**, although both lenders offer a 10-year repayment term.
- **Lender A:** 8.25% interest rate, 8.74% APR, $1,050 in origination, appraisal, and closing fees
- **Lender B:** 8.60% interest rate, 8.63% APR, $350 in upfront fees
The lower advertised rate makes Lender A look better, but the APR favors Lender B. I’m also unsure how my five-year holding period changes the comparison, since I’d still have a remaining balance to pay off if I sell or refinance then.
Would you compare these offers using the APR, or calculate the five-year cost by including the upfront fees, monthly payments, interest paid, and remaining loan balance after 60 months? Is there a reliable way to calculate how long I’d need to keep the loan before Lender A’s lower rate offsets its additional $700 in fees?
1 reply
APR is not the deciding figure if the loan will be paid off after about five years. It is based on the lender’s assumptions about fees and the full repayment schedule, not necessarily a 60-month payoff.
Compare both offers through payment 60:
1. Calculate each monthly payment using the stated rate and 10-year term.
2. Add the first 60 payments and upfront fees.
3. Add the remaining principal after payment 60, since that is what must be paid at sale or refinance.
Equivalently, compare upfront fees plus interest paid during the first 60 months. Including the payoff balance in the cash-flow calculation gets to the same result.
Using the figures provided, A’s payment is roughly $736 a month and B’s is roughly $747. A also should have a somewhat lower balance after 60 payments because more of each payment goes to principal. The payment difference alone would take about 70 months to offset A’s extra $700 in fees, but the lower payoff balance shortens that break-even. On a five-year comparison, A appears to be modestly cheaper, roughly a couple hundred dollars, assuming the quoted rates, fees, and terms are otherwise identical.
A loan amortization calculator can provide the exact payment-60 balances and interest totals, but the key is to use the planned payoff date rather than APR alone.
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