While the interest rate determines the cost of borrowing money, the annual percentage rate (APR) is a more accurate picture of total borrowing cost because it takes into consideration other costs associated with procuring a loan.
- Interest rate: The annual cost of borrowing the principal loan amount, expressed as a percentage, and does not include all fees.
- APR: The annual cost of the loan, including fees, and reflects the true cost of borrowing. It is often higher than the interest rate.
Interest rates fluctuate based on various factors, including inflation, economic conditions, and Federal Reserve policies. Your personal financial situation can also affect the rate offered by a lending institute. Your credit score, debt ratio, down payment amount, loan type and over-all creditworthiness can influence the interest rate offered by a lending institute.
A loan’s annual percentage rate (APR) measures the total cost of borrowing money. APR is designed to represent the long-term cost of a loan, from closing day to the date it’s paid off. Rather than looking at interest rate alone, the APR on a mortgage includes lender charges and fees like:
- Mortgage insurance
- Discount points
- Mortgage origination fees
- Other closing costs
APR is calculated by finding the total cost of a mortgage loan’s upfront fees, then spreading them over the life of the loan to estimate the yearly cost. This is added to the interest rate to find the ‘real’ annual cost of financing. The APR indicates the true amount you will pay on top of the balance of the mortgage and helps borrowers compare loans. The higher the APR the more the loan costs.
Mortgage lenders are mandated by the Truth In Lending Act to disclose a home loan’s APR as well as the interest rate each time they provide a loan offer. The APR is helpful when comparing loans.
Discover more from Real Estate Matters in Charleston SC - Gena Glaze
Subscribe to get the latest posts sent to your email.
Real Estate Matters in Charleston SC - Gena Glaze 