What is the Difference Between Interest Rate and APR?

Whether you prequalify for a mortgage, get pre-approved, or wait to apply for one until after you have found the home you want to buy, two things you will notice on the paperwork and truth in lending documentation are there will be an interest rate and an annual percentage rate (APR). There are key differences between the two, which you need to be aware of so you can choose the best loan program to satisfy your needs and budget.

What Is the Interest Rate?

The interest rate is the fee charged by the lender on the principal amount borrowed for the Interest Rate vs APRmortgage. It does not take into account any other costs of borrowing, like certain closing costs, mortgage insurance, discounted points, and broker fees.

The interest rate could either be a fixed rate or an adjustable rate, based on the type of mortgage programs you qualify for and which one you choose. With fixed rate loans, the interest rate never changes over the life of the loan. On the other hand, adjustable rate loans (ARMs) can adjust over the life of the loan and could increase or decrease.

Why Do Interest Rates Matter?

Interest rates matter because they help determine the total monthly payment you make each month on your mortgage. If you are looking to pay the same amount each month and intend to keep the home more than five years, then you should consider a fixed rate loan.

If you are looking for a lower upfront monthly payment and are okay with your payments Wanting the Lowest Mortgage Ratepotentially increasing later, or intend to keep the home for a short period of time, then an ARM loan with a low initial fixed rate could be a wise choice.

If you are looking for the lowest monthly payment offered by mortgage lenders in Chicago, then you will want to compare the interest rates of various loan programs and products. However, you should never compare fixed rate loans against ARM loans because the interest rates on ARM loans will most likely adjust. When comparing loans, remember to compare fixed rate to fixed rate and ARM to ARM.

What Is APR?

The annual percentage rate (APR) includes other costs of lending, along with the principal, such as:

  • Discounted Points
  • Broker Fees
  • Certain Closing Costs
  • Mortgage Insurance

APR is a percentage, like the interest rate, and is normally higher. The APR is not used to determine your monthly payments but, rather, the actual total costs of lending you will notice on the loan disclosure pages of your mortgage documentation.

Why Does APR Matter?

APR is important in cases where you intend to purchase the home and remain there for a long period of time. By reviewing and comparing the APRs of different loan products and programs, you can shop around and find the one that has the lowest total costs of lending, which will save you money.

When comparing APRs, there are a few things you need to keep in mind.

  1. APRs on ARM loans are not always accurate, as they are essentially estimates on Does APR Matterthe expected performance and changes in rates over the life of the loan.
  2. On fixed rate loan products, make sure the loans are for the same principal amounts. You would not want to compare a fixed rate loan with a 20% down payment to another fixed rate loan with a 10% down payment and mortgage insurance, as the total costs of lending would vary greatly because mortgage insurance is a cost included in APR calculations.
  3. The loan program with the lowest APR may not mean it also has the lowest monthly payment. It is not uncommon to find a loan with the lowest total costs of lending but higher monthly payments, compared to another loan that has a higher total cost of lending yet a lower monthly payment.

To summarize, interest rates determine your monthly mortgage payments, while APRs determine the total cost of lending. When comparing mortgages, remember to compare interest rates to interest rates and APRs to APRs, as this will provide you with details on how much your monthly payments will be and the total costs of lending for that particular loan program.

Please keep in mind, when comparing the interest rates and APRs of loan programs: They should only be used as estimates, and your actual interest rate and APR could change, based on several factors, including your credit history, credit score, and the amount of the down payment.

If you have further questions about interest rates, APRs, fixed rate and adjustable rate loans, or if you need help finding the best mortgage that fits your budget, please feel free to contact Chicago mortgage broker and banker A and N Mortgage by phoning (773) 305-LOAN (773-305-5626) to speak with one of our loan experts today!