The Difference Between APR and Interest Rate

Published on June 2nd, 2017

Most homebuyers focus on the interest rate when searching for home loans, but what about the annual percentage rate (APR)? While they both describe important costs pertaining to your loan, most homebuyers don’t understand what each incorporates. By grasping a better understanding, you could potentially save thousands of dollars on your home loan.

What’s the difference?

The interest rate is the amount charged by the lender for the cost of borrowing the loan. Your interest rate is included in the APR, along with other loan charges such as broker fees and closing costs.  While the interest rate calculates what your monthly payment will be, the APR uses multiple fees to provide the total cost of the loan. Your APR is typically higher than your interest rate.

The importance of examining APR

Looking over APR is extremely beneficial because it takes all of the other points, fees and finances into account and allows you to compare the overall cost of various loans. A lender can have the lowest advertised interest rate, but once adding up the other finances, their loan may easily end up more expensive than another with lower points and fees. Be sure that when you compare lenders you are also comparing APR’s.  Receiving a fair comparison of the total costs translated into a rate is very important when it comes to finding the most affordable loan.

Keep your time horizon in mind

 It’s important to note that how long you plan on living in your home affects which loan you should choose. If you’ll be in your home for at least 30 years, you should shoot for the lowest APR because then you’d pay the least amount for your home. However, if you don’t intend to be in your home that long, it may be more sensible to pay lower fees initially and accept a higher rate and APR. Also, if you plan on paying off your mortgage early or refinancing mid-term, this might make APR comparisons less useful for you.

While interest rate and APR are important, your loan officer will explain to you what your best option would be regarding your specific situation. If you have any questions about interest rate or APR, contact a loan officer today at 1-844-77-vLoan or get a free rate quote to estimate your monthly payment.




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