Mortgage APR Vs interest rate: The difference clarified
When you consider taking out the most affordable home mortgage loan, you possibly think about the interest rate only. Though an affordable interest rate is essential for a good offer, you must also understand that there are other fees associated with a mortgage that might make it costlier than the interest rate suggests. For assisting consumers to figure out the true cost of borrowing a home loan, lenders can work out the APR or annual percentage rate on the mortgage. They are essentially necessitated by law to advertise this useful figure beside the base interest rate of the loan.
The interest rate on your mortgage is the fee that the lender asks for as a cost of using the loan for a particular period of time. If you have good credit, then you can qualify for a better interest rate. The interest rate is not the only cost for a mortgage. There are other mortgage fees and charges that make a loan more expensive.
This is where the APR comes into play. The annual percentage rate is formulated to take into consideration the overall cost of the loan by including not only the base interest rate but also the points, closing costs and other fees.
For instance, you might need to pay a particular amount of points for getting your mortgage. One point is equal to 1% of the total loan amount. You typically pay points for reducing the interest rate on your loan. A reduced interest rate implies the lender would gain in the long term. Hence, he would ask for the points as an upfront fee to compensate for the loss in profit. If you paid one point on a loan amount of $300,000, you would be paying $3,000. With the annual percentage rate, this amount would be summed up with the base interest rate to show the cost of the loan more precisely.
The other major charges included in the APR are the closing costs. These include fees like private mortgage insurance (PMI) and application fees. Any service offered by the lender during loan processing is incorporated into the APR. Closing costs can amount anywhere from $200 to $2,000 depending on the neighborhood and your home value. When you add closing costs and points to the base interest rate, they raise the overall cost of the loan and make the APR higher than the interest rate.
Knowing the difference between the APR and the interest rate would help you become a more competent loan aspirant. Use the annual percentage rate to compare loans. This would make sure you compare apples to apples, helping you choose the cheapest loan for your needs.
