When shopping for a mortgage, it can be difficult to know how to make a real comparison. Some lenders advertise rates that sound much better than their competitors and only disclose APRs in the fine print. Learn about the interest rate differential between APR and APR so you can become a savvy mortgage borrower and possibly save some money in the process.
What is an interest rate?
The interest rates associated with a mortgage reflects the cost you pay to borrow money. With a fixed-rate mortgage, the interest rate never changes over the life of the loan (for example, a 30-year mortgage has a term of 30 years). Adjustable rate mortgage (ARM) rates can change at specific intervals based on market conditions.
When shopping for a mortgage, it can be difficult to know how to make a real comparison. Some lenders advertise rates that sound much better than their competitors and only disclose the APR in the fine print. Learn about the interest rate differential between APR and APR so you can become a savvy mortgage borrower and possibly save some money in the process.
How are interest rates calculated?
The interest rates associated with a mortgage reflects the cost you pay to borrow money. With a fixed-rate mortgage, the interest rate never changes over the life of the loan (for example, a 30-year mortgage has a term of 30 years). Adjustable rate mortgage (ARM) rates may change at specific intervals based on market conditions.
What is APR?
APR stands for annual interest rate and represents the cost of your mortgage, including interest rate and certain other fees and settlement costs.
APR is not the same as your interest rate. For example, if you have to pay upfront fees or credits, those fees will be included in the APR.
The Truth in Lending Act (TILA) requires mortgage lenders to disclose APRs to borrowers. However, it is important to note that lenders may not include all fees in the APR-they do not have to include certain costs, such as credit report, appraisal, and inspection fees. Ask your lender what is and what is not included in the APR when comparing quotes so you know exactly how much each loan costs.
How is the APR calculated?
There are three main numbers involved in determining the APR: interest rate, fees, and any points you choose to prepay. You can use Bankrate’s APR calculator to see how different interest rates and points affect the total cost of your loan.
Differential rate between APR and APR
While APR and interest rates provide a benchmark for comparing different loans, the main difference between interest rates and APRs is that APRs include many of the other fees you will have to pay to get a mortgage. Interest rates are lower than APRs, which is why you will see their ads often.
For example, consider a 30-year fixed-rate mortgage on a $350,000 home, where the buyer makes a 20% down payment. The lender advertises a 5% interest rate, but the borrower has to pay a 1% origination fee and some other fees, totaling $800. These additional charges make the APR 5.111%.
Why is the APR higher than the interest rate?
The APR of a loan is higher than the loan’s interest rate because it takes into account various borrowing costs. The loan interest rate simply describes the interest rate on the loan balance. The APR takes into account the interest, but also adds the fees you have to pay and some other charges. When you add the extra cost to the interest cost, the APR will be higher than the simple rate.
Examples of mortgage loans with different rates and APRs
Here are some examples comparing different rates and APRs for a $300,000 fixed rate mortgage for 30 years:
| INTEREST RATE | 4.5% | 4.75% | 5% |
|---|---|---|---|
| Discount points | 2 | 1 | 0 |
| Points and fees | $9,800 | $6,800 | $800 |
| APR | 4.776% | 4.945% | 5.111% |
| Monthly payment | $1,520 | $1,564 | $1,610 |
| Total paid after 3 years | $54,722 | $56,337 | $57,960 |
| Total paid after 10 years | $182,407 | $191,392 | $193,200 |
| Total paid after 30 years | $547,221 | $574,178 | $579,600 |
If you plan to stay in your home for a shorter period and want to buy a discount to reduce the price of the home, you will need to do the math to determine your break-even point. Bankrate’s Mortgage Point Calculator can help. In short, you need to stay home long enough to allow enough time savings to balance out these extra upfront costs.
Spodná čiara
The loan interest rate measures the amount of interest accrued on the balance, while the APR represents the interest and other charges you must pay. Ultimately, this means that the APR can provide a clearer picture of the cost of the loan, so you should look at the loan’s APR when comparing various offers.
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