What is the difference between Interest Rate and APR?

Real Estate Broker/Owner with Texas Five Star Realty, Plano Texas

Annual Interest Rate (INT): Is a simple interest rate that is used to calculate the interest amount for a given loan amount and a period. For example; $100,000 loan with interest rate of 4% incurs an interest amount of $4000 per year.

Annual Percentage Rate (APR): Interest and fees charged on a loan annually. The APR includes points and other bank/lender fees paid by the borrower and it is the true cost of the loan in term of interest rate per year.
Example: The loan amount is $100,000 and the advertised annual interest rate is 4% (same as above example). However, total cost of the loan to borrower, let's say, is $3,000 (
Loan Origination Fee, Loan Discount Fee (paid by buyer), Mortgage Insurance Premiums, Mortgage Broker Fees, etc.) In this case, the lender will be reimbursed for his share from the approved loan amount and the rest $97,000 ($100,000-$3,000) will be credited to the buyer at closing. The total annual interest stays the same $4000, therefore the Annual Percentage Rate (APR) for the above example becomes $4,000/$97,000= 4.125%. In this case, as you see, the APR is about 1/8% more than the actual advertised interest rate. To see what charges are included in the APR calculation, please see the table at: http://www.texasfivestarrealty.com/MyBlogs_APR.asp


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Bahman Davani, CM at Texas Five Star Realty, Plano, TX (214) 457-7055

Homes for Sale in Plano, Frisco, Prosper, Allen TX
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