When you’re buying a home and taking out a mortgage, you want to find a quality lender that also gives you a great deal. It’s such an important life decision, so most buyers want to compare their options and find the best fit.
To get to a proper comparison, you have to compare apples to apples and oranges to oranges, as the adage goes. So, to help you in that endeavor, we’re setting out to tackle the difference between APR and interest rate.
What is an Interest Rate?
The interest rate on your loan is the annual cost you’re paying to borrow money from your lender, shown as a percentage. It’s important to note that the interest rate doesn’t reflect any other fees, charges, or costs associated with your loan.
What is APR?
APR stands for annual percentage rate. This rate includes your interest rate, along with other costs that are part of your loan, including points, broker fees, and other charges.
APR is meant to paint a more complete picture of the total cost of your loan. Since APR includes your interest rate and any other fees that are part of your loan, it will be higher than the interest rate, unless your lender is offering a rebate on part of your interest expense.
Additional Considerations When Comparing APRs
At this point, you’re well equipped to begin applications with lenders in search of the right mortgage program for your next purchase. We’ve discussed the differences between interest rate and APR and how to best compare your loan options. Here are some additional aspects to be aware of when comparing the APRs of various loan offers you receive:
- Attractive APR quotes seen in ads assume the best borrower scenario. If you see a great rate, understand that it’s typically calculated using a stellar credit score and payment history.
- Lower APRs can come with higher upfront costs. Like we discussed, APR is calculated over the entire loan term, so if you pay your loan off early or refinance it, you might end up paying more than if you’d gone with a different lender.
- Advertised APRs may not include PMI (private mortgage insurance). Lenders have some flexibility in calculating and advertising APRs, so looking at the actual quote on your loan estimate is your most accurate resource.
Understanding the intricacies of the mortgage process can seem daunting, and that’s why we aim to break it down and make it easy to understand. Our loan officers take that same approach and pair it with their customer-driven focus on providing an excellent and customized experience to each of their clients. If you have more questions about APRs and interest rates, or the mortgage process in general, our team will be happy to help out.