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What is the difference between APR and Interest rate?

By
Real Estate Agent with REALTY PROS
Over the past 7 years of being in real estate, there is a common question that is asked by the purchaser at every settlement without fail, "What is the difference between APR and Interest rate?"



This question comes up when the buyer is reviewing the Truth-In-Lending disclosures with the settlement attorney. Then, out of nowhere appears a HUGE number showing the payment of the loan after 30 years!



What is Truth-In-Lending disclosure?

Truth-in-Lending disclosures are designed to standardize the way loan details are presented to purchasers. The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to promote the informed use of consumer credit. TILA allows consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes.



What is APR (Annual Percentage Rate)?

According to Wikipedia, the APR is described as "the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate."



What is Interest Rate?

According to Wikipedia, "the interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender."



How does this affect YOU?

When the purchaser agrees on the note rate with a loan officer as the monthly mortgage payment that is your interest rate. The APR is just a percentage when you factor in the cost of the additional finance charges you may pay in conjunction with the loan along with the interest rate.



These finance charges including interest rate are calculated to derive an APR (Annual Percentage Rate). It’s factored into a percentage over the full life of the loan (ie. 15 or 30 years).

1. Origination fees

2: Points

3: Buydown funds from the buyer

4: Prepaid mortgage interest

5: Mortgage insurance premiums

6: Other lender fees (application, underwriting, tax service, etc.)



I share the opinion of my loan officer colleague, Chris Jordan of First Home Mortgage, "It's a pointless factor because people don't stay in a home for 30 years." The interest rate is the only thing that matters to purchasers--everything else is the just the cost of doing business.

Please share with me your thoughts on the subject.



APR vs. Interest rate

Hopefully you found this post useful! If you need help finding or selling your Washington DC home, please contact Jason Trotman at 301-452-4767. If you’re new to DC, I’d especially like to extend a warm welcome. I value the opportunity to help my clients find the home that meets their needs and provide them with professional, reliable service.

Comments (2)

Jason Trotman
REALTY PROS - Washington, DC

I absolutely agree Dale!  It's like clockwork on every settlement!

 

May 16, 2011 12:22 PM