APR vs Interest Rate

APR vs Interest Rate — do you know the difference? If you’re like most consumers, you’ve heard both terms, but aren’t exactly sure what the differences are between the two. Understanding these differences will help you make wiser decisions when choosing a mortgage bank, and could save you a significant amount of money when you purchase a home.

Annual Percentage Rate (APR)

In mortgage terms, APR is the annual rate charged for borrowing money, and is stated as a percentage that represents the yearly cost of funds over loan’s term. Moreover, this rate also includes any fees or additional costs associated with the loan, such as points and mortgage broker fees. Because of this, the APR is usually higher than the mortgage interest rate.

The Federal Truth in Lending Act requires that every consumer loan agreement must disclose the APR of the loan and must follow the same exact rules to ensure accuracy. This allows potential homeowners to make “apples-to-apples” loan comparisons when evaluating mortgage lenders.

Interest Rate

Simply put, the interest rate is the cost you will pay each year to borrow money for your home purchase. Unlike the APR, the interest rate does not reflect additional costs or fees.

APR vs Interest Rate — Using the Right Rate

When used separately, the APR and the interest rate have their limitations. However, when taken together, potential homeowners should be able to use both to determine both their monthly payments and their total costs. Incurring both in a proper strategy can minimize your total costs.

They key is to know when to use an APR and Interest rate. If you are focused on getting the lowest monthly payment possible, you should focus on the interest rate. If you are more concerned with the total cost of the loan, they you should use the APR.

We hope this article has helped you understand APR vs. Interest rate and will help make you wiser decisions when considering a mortgage.

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