Learn the Differences Between APR and Interest Rate
To compare mortgage loans, it is important to understand both the mortgage’s interest rate and the mortgage’s annual percentage rate (APR). Freedom Mortgage will work with you to explore all loan options because we offer dedicated mortgage guidance every step of the way.
The interest rate is the cost you will pay each year to borrow money, and this is expressed as a percentage rate. The base interest rate does not reflect any fees or other charges you may have to pay for your mortgage loan.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is a broader measure of the cost to borrow and it is also expressed as a percentage rate. In general, the APR reflects the interest rate plus any points and other charges that you pay to get the loan. For that reason, your APR is typically higher than your interest rate.
Points are an up-front fee paid to the lender when you close on your loan. Each point equals one percent of the loan amount.
Lastly, closing costs typically consist of loan related fees, title and escrow charges, government recording and transfer charges and can add thousands of dollars to the cost of your loan.
Let’s take a look and compare two loan options:
|Mortgage A||Mortgage B|
|30-year term||15-year term|
|Interest rate of 4.99%||Interest rate of 4.125%|
|APR of 5.208%||APR of 4.199%|
|Monthly payment $1,072.42||Monthly payment $1,151.31|
|Mortgage A requires that 2 mortgage points be paid - This is a discount point cost of $4,000 + $1,000 in closing costs.||Mortgage rate B is offered with 0 mortgage points and just $1,000 in closing costs|
It may appear that Mortgage B has a lower rate, but it is important to read online assumptions or disclosures when making a comparison. You may find that the posted rate may only apply to customers who meet certain conditions such as excellent credit, a $200,000 loan size or the rate is quoted only for a specific state or zip code. Your Freedom Mortgage loan specialist can help you understand more about interest rates and the options available to you based on your unique situation.Learn more when shopping for rates
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