Understanding APR vs. Interest Rates in Mortgage Loans

Hey there, mortgage seekers! If you're new to the home loan game, you might be scratching your head at the difference between APR and interest rate. Well, let me break it down for you. The APR, or annual percentage rate, includes the interest rate and additional fees, giving you a more comprehensive view of the total cost of borrowing. Josh Jampedro, our branch manager at Home Loan Advisors, is your go-to guy for navigating the mortgage maze in Florida and Wisconsin.

So, you're shopping for a mortgage, and you keep seeing two different percentages on all of the mortgage quotes. One says interest rate and the other says APR, but what's the difference? Today we're going to tackle a topic that often causes confusion when it comes to getting a mortgage, and that's the difference between APR and interest rates.

The Basics of APR and Interest Rate

APR stands for the annual percentage rate, which is a little bit different than your actual interest rate on the mortgage. Think of the interest rate as the cost of borrowing money itself. This is what you actually pay on your mortgage payment. It's the percentage that you're charged on the loan amount. So if you're borrowing $100,000 at a 4% interest rate, you'll pay $4,000 in interest for the year. But here's where things get interesting. APR, the annual percentage rate not only just includes the interest, but also the other fees and costs associated with the mortgage, such as the lender's origination fees, discount points, and any other finance related charges expressed as a percentage and added to the interest rate. The intention of APR is to help gauge the total cost of the mortgage so that you can compare different loan offers and kind of measure them equally. This way, if you have one lender who's offering you, let's say, a 4% interest rate with a $20,000 origination fee, you can better understand that that interest rate isn't only the important factor in the equation.

How APR Differs from Interest Rate

So, for example, if we take that same $100,000 loan and a 4% interest rate, but now include $20,000 in fees, which is astronomical, obviously, your APR is more like 6%. So over 30 years, add that $20,000 to the 4% you're going to pay in interest, and it's really like paying 6% in interest. It's kind of the equivalent of 6%, essentially. Even though you're only paying 4% per year. This means that you're not paying just for the money that you borrowed, but also these additional costs. And so APR is a way to kind of factor in those additional costs into the interest rate so that you can see kind of the total cost of borrowing. So, as you can see, the APR gives you a more comprehensive view of the total cost of your mortgage. It's like comparing the total cost of shopping at different stores. It's not always just the sticker price that you're looking for. When you're comparing mortgage offers from different lenders, looking at the APR helps you to see the bigger picture.

The Impact of APR on Your Mortgage

A lower APR can, not will, but can indicate a loan with lower costs over the term of the mortgage. However, APR can be a little bit misleading, and lower isn't always better. That's because mortgages are a very long term, typically 30 years, and most people don't stay in their loan for 30 years, which I'll talk a little bit more about APR and misconceptions in another video, but here's a couple of quick things to just keep in mind. When it comes to APR. Always ask your lender for both the interest rate and the APR, when discussing mortgage options, consider the APR when you're comparing different loan offers, make sure that you're considering that as the overall picture when it comes to buying a home or financing a home. Keep in mind that a really low APR with a lot of upfront fees might also not be the best decision either.

Tips for Comparing Mortgage Offers: APR and Interest Rate Analysis

So, always be aware of any costs associated with any loan options that you're taking. So there you have it. APR and interest rates demystified. By understanding the difference between the two and considering the APR when comparing mortgages, you're equipped to make smarter financial decisions. If you have any questions, feel free to reach out to me. Mortgages are complex, so let me give you the tools that you need to make the right decisions.