APR vs. Interest Rate
Anytime you are looking at purchasing or refinancing a home, you will see a lot of numbers thrown around in advertising and when you speak to lenders. Let's take a minute out to break the code on these two factors for your mortgage.
- APR (Annual Percentage Rate) - this is the annual cost of the loan per year to the borrower, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees such as mortgage insurance, most closing costs, discount points and loan origination fees.
- Interest Rate - refers to the annual cost of a loan to a borrower and is expressed as a percentage. This is the number that your monthly payment is based on to service your mortgage debt.
So what is the difference and why does it matter?
The APR is intended to give you more information about what you’re really paying. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing certain costs of loans.
Remember, though: Your monthly payment is not based on APR, it's based on the interest rate on your promissory note.
A simple way to think about it is what is it costing me to get the interest rate I am receiving. A good example would be that you have shopped and see that 6% is the payment rate you are being offered, you’re want the lowest APR based on that rate. Maybe one lender offers you that rate with an 6.25% APR, and another a 6.5% APR. The 6.25% APR lender is charging you fewer fees to get the same interest rate.
Please note that when shopping for a loan, you want to make sure that you are comparing like loans and question fees to determine if one lender may be charging more or if the lower priced lender is omitting fees from your original estimates.
A higher APR isn't always a bad thing.
If you buy discount points to lower your interest rate, yes you will have a higher APR, but the lower monthly payment could be worth if as you will make up for the additional fees by paying less in interest thanks to that lower payment rate. This is sometime the logical answer for someone who may be buying their "forever home" and want to take advantage of the lowest possible interest rate and payment over the life of the loan.
If you have questions about any costs of fees associated with a mortgage estimate, contact one of our professionals today.
