Buying a home is a large investment and it’s important to have a clear understanding of the cost of your mortgage loan. Home shoppers are often confused about the difference between APR (Annual Percentage Rate) and interest rates. When evaluating a mortgage loan, interest rates can tell a different story than APR. It’s important to note that neither is better or worse than the other. If you understand what each represents, then you can make an educated decision on your mortgage loan.
What is an Interest Rate?
An interest rate is the annual cost of borrowing a loan but does not include fees and additional costs involved with obtaining a mortgage loan. Your interest rate is found at the top of the Loan Estimate (LE) that Chris Doering Mortgage provides. Your mortgage interest rate may go up or down based on various factors during the home buying process. You can choose between a fixed or variable interest rate, resulting in different mortgage loans:
Fixed Rate Mortgage: This rate is fixed when you take out the loan and will not change for the lifetime of your loan. The advantage of this rate is that you, as the borrower, can rely on your monthly mortgage expense to be consistent.
Adjustable Rate Mortgage: An adjustable rate will go up or down throughout the lifetime of your loan. These may start out lower than your fixed interest rate and stay consistently low for an introductory period before it begins to go up.
What is the APR (Annual Percentage Rate)?
An annual percentage rate (APR) is a measure of the cost of the credit, expressed as a yearly rate. This includes interest rate and any other charges or fees. All lenders follow the same rules to ensure the accuracy of the annual percentage rate.
APR was developed to give borrowers a measure that could be compared to all loans. For example, borrowers could be considering a loan with an advertised low stated interest rate, but high fees. It would be hard to compare this loan directly to one with a higher interest rate and lower fees. Since the APR is inclusive of fees and interest, mortgage shoppers can use it for two different loans and compare apples-to-apples.
Should I Only Consider APR?
Low APR is not the only factor to take into consideration. Depending on how long you plan on staying in your home, a lower APR may not reflect the best mortgage loan option. Low APR should be weighted more if you plan to pay your mortgage off over the course of the entire term of the loan. If not, your upfront costs are allocated over a shorter period of time, making the cost of the loan larger.
Realistically, most people do not keep the same loan for 30 years. Therefore, if the APR is for a 30-year loan, it may not be an accurate measure of the value of your loan. If you pay more fees upfront to get a lower lifetime interest rate, you may not keep your home long enough to enjoy that low interest. You can compare this to reserving a vacation home for a week to secure a lower rate, yet you only use it for three days.
At Chris Doering Mortgage, your loan originator can show you what the APR of your loan would be if your loan had a lifetime based on your unique situation. Our team will be there with you for every step of the process. Our goal is to help you walk away with a loan that makes sense for you with as little hassle in the process as possible.