Interest Rate Vs. APR – What Is The Difference?

Understanding the difference between annual percentage rate (APR) and interest rate could save you thousands of dollars on your mortgage. But if you’re like most homebuyers, you probably don’t know that the interest rate and the APR measure 2 important, but different, costs associated with your home loan.

Your interest rate is the cost you will pay to borrow money. It only includes the interest percentage you will be charged for borrowing the money, and it does not include any other fees you might be required to pay on the loan—like the origination fees, mortgage broker fees, closing fees, documentation fees, etc.  The APR of a loan gives you a more detailed idea of how much you’ll pay when you borrow money for a loan. Basically, it’s the total price of borrowing money expressed in terms of an interest rate. That means it includes the cost of interest plus additional fees. They are always expressed as a percentage.

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Why have both?

The main difference is that the interest rate calculates what your actual monthly payment will be. The APR calculates the total cost of the loan. A consumer can use one or both to make apples-to-apples comparisons when shopping for loans.”

How To Pick The Right Mortgage Loan

For example, a 30-year fixed rate loan with a 4% rate will have a lower monthly payment than a loan with a 5% rate. Likewise, the total cost of a loan with a 5% APR will be less than one with a 5% APR. Separately, the interest rate and the APR have their limits. But together, borrowers should be able to use both figures to determine their monthly payments, as well as their total costs. The trick is to understand the interplay between the 2 figures. If you are only focused on getting the lowest monthly payment, they should focus on the interest rate. If you focused on the total cost of the loan, then they can use the APR is your best comparison tool.

Mortgage intrest rate vs. APR for San Diego homebuyers

CLICK TO ENLARGE

Should I Buy Down The Rate?

Points, also known as “discount points,” are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can, in turn, lower your monthly mortgage payments.

A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000). You’re essentially paying some interest up front in exchange for a lower interest rate over the life of your loan.

The general rule is that the longer you plan to own the home, the more you might benefit from buying points, because you would realize more interest savings over the life of the loan. When you consider whether points will be right for you, it helps to run the numbers. Here’s an example:

discount points in a mortgage loan

CLICK TO ENLARGE – Source: Bank Of America

 

Ryan Blanco-Realtor-San Diego Real Estate BlogAbout Me: I am a full time agent and I dedicate 100% of myself and my time to my valued clients in addition to the San Diego communities that I serve. It is imperative that I continuously evolve with local and national trends in addition to always looking ahead of the industry. It is a must to always provide the best service to my clients, their families and friends.

619.384.2248
Ryan@RyanYourRealtor.com

 

 

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