We understand that the mortgage process can be complex. Two key aspects of a mortgage – or really any loan – are the annual percentage rate (APR) and the interest rate. Many homebuyers, especially first-time homebuyers, may not know the difference between APR and interest rate, but with our guidance, understanding these two different costs of a home loan will be a breeze.
Interest Rate vs. APR
Interest Rate: The cost of borrowing the principal loan amount (the amount of money you are being loaned) is called the interest rate. It can be fixed or variable, but it is always expressed as a percentage.
APR: Includes the interest rate plus other costs such as fees, discount points, and some closing costs. Simply put, it is a broader measure of the cost of a mortgage. Like the interest rate, APR is always expressed as a percentage.
How does this affect your mortgage?
The interest rate calculates what your actual monthly mortgage payment will be. The APR on a loan measures the total cost of a loan. For example:
Staying for a while: Given a 30-year fixed rate loan, it makes more sense to take out a loan that has the lowest APR possible, if you plan on staying in your home for the 30-year term. You will end up paying a lower amount over the 30 years.
Not ready to settle down: It may make sense to pay fewer upfront fees at a higher rate, and a higher APR, if you don’t plan on staying in the home for more than a few years. That way the total cost will be less over the short time you are in the home.
If you have any questions about APR or interest rates, don’t hesitate to contact us!