Understanding the Difference Between Interest Rates and Annual Percentage Rates
When you're looking at buying a home at the Lake of the Ozarks, you know you'll need to start shopping for a mortgage loan. But if you’re like most home buyers, you might not know about all the things you should be considering when shopping for a loan. One of those important factors is knowing that the interest rate and the APR measure two different costs associated with your home loan, and this could affect your overall cost. Many consumers make the assumption that they're one in the same. However, understanding the difference between an interest rate and an annual percentage rate (APR) could save you thousands of dollars on your mortgage.
Here's the Difference
The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. An annual percentage rate (APR) reflects the mortgage interest rate plus other charges. There are many costs associated with taking out a mortgage. These include:
The main difference is that the interest rate calculates what your actual monthly payment will be. The APR calculates the total cost of the loan. In general, the APR reflects not only the interest rate but also any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate. A consumer should look at both to make apples-to-apples comparisons when shopping for loans.
A loan with a 4 percent rate will have a lower monthly payment than a loan with a 6 percent rate, assuming both are fixed for the same term. Likewise, the total cost of a loan with a 4 percent APR will be less than one with a 6 percent APR. The example below shows the interest rate, APR and total costs over time for a $200,000 mortgage in which 1.5 discount points cut the interest rate by one-quarter of a percentage point, and another 1.5 discount points cut the interest rate by a further quarter of a percentage point.
Choose the Right Lender
When shopping for a mortgage, look at not only the interest rate and APR, but also the other costs of the loan that aren't included in APR. Ask your lender how they calculate the APR and what costs are included. We understand that these calculations can often be confusing for most homeowners, which is why it’s crucial to pick the right lender who is willing to go over these numbers with you so that you fully understand what you're signing up for. At MHQ - Mortgage HeadQuarters, we're here to ensure you have the mortgage loan that is right for you! So, if you're ready to start talking loans and rates, let's sit down and chat! We're your trusted mortgage professionals at the Lake of the Ozarks and would be happy to assist you in financing your dream home at the Lake!
Mortgage Headquarters of Missouri, Inc
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
Email: info@mhqmortgage.com
NMLS # 1229111
Here's the Difference
The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. An annual percentage rate (APR) reflects the mortgage interest rate plus other charges. There are many costs associated with taking out a mortgage. These include:
- The interest rate
- Points
- Fees
- Other charges
The main difference is that the interest rate calculates what your actual monthly payment will be. The APR calculates the total cost of the loan. In general, the APR reflects not only the interest rate but also any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate. A consumer should look at both to make apples-to-apples comparisons when shopping for loans.
A loan with a 4 percent rate will have a lower monthly payment than a loan with a 6 percent rate, assuming both are fixed for the same term. Likewise, the total cost of a loan with a 4 percent APR will be less than one with a 6 percent APR. The example below shows the interest rate, APR and total costs over time for a $200,000 mortgage in which 1.5 discount points cut the interest rate by one-quarter of a percentage point, and another 1.5 discount points cut the interest rate by a further quarter of a percentage point.
When shopping for a mortgage, look at not only the interest rate and APR, but also the other costs of the loan that aren't included in APR. Ask your lender how they calculate the APR and what costs are included. We understand that these calculations can often be confusing for most homeowners, which is why it’s crucial to pick the right lender who is willing to go over these numbers with you so that you fully understand what you're signing up for. At MHQ - Mortgage HeadQuarters, we're here to ensure you have the mortgage loan that is right for you! So, if you're ready to start talking loans and rates, let's sit down and chat! We're your trusted mortgage professionals at the Lake of the Ozarks and would be happy to assist you in financing your dream home at the Lake!
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
Email: info@mhqmortgage.com
NMLS # 1229111
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