Your Interest Rate and APR: The Vital Difference

Mortgage Rate Written on a PaperYou probably notice that your home loan’s APR or annual percentage rate is different from your base or interest rate. But did you know that it’s extremely crucial that you fully understand how your home loan’s interest rate works before signing any paperwork because it’s what determines what you would need to pay so that you could borrow the money you need for that dream home?

What Your APR Could Tell You That Your Interest Rate Couldn’t?

Your base or interest rate determines how much your payments would be every month. On the other hand, your APR determines your overall cost over time. This includes all kinds of fees, closing costs, processing fees, brokerage fees, title insurance, underwriting fees, mortgage points, and home appraisal costs. Depending on your mortgage, points could either cover your loan origination costs or reduce your base rate by a percentage for every mortgage point.

When you’re considering your home loan options, whether a conventional loan or the FHA loan program, one lender might be charging you higher fees than the others. Primary Residential Mortgage, Inc. shares that a great way to figure this out is to compare APRs.

Check the Closing Disclosure and Loan Estimate documents to see your loan balance, APR, interest rate, payment, period, as well as related fees, which essentially includes a complete itemization of all your mortgage’s details. If you don’t understand anything, talk to your mortgage officer.

The Bottom Line

Put simply, the difference between your interest rate and APR is that your interest rate is your contract rate and your APR is your interest rate amount and all fees to third parties. The annual percentage rate could help you compare the costs of borrowing among different mortgage lenders. However, remember that base rates fluctuate every day, so you have to compare APRs that were generated on the same day for the same repayment term and loan type. With this in mind, you have to look beyond your interest rate and monthly payment to your APR so that you could see how much you would need pay for your mortgage.

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