When looking for mortgages, you will come across information on interest rate and APR. These are usually misinterpreted as being synonymous, but they represent different things. It is helpful for borrowers to analyze both. Below are details on the difference between interest rate and APR for MA home loans.
Interest Rate and APR
Interest rates apply to monthly mortgage payments over the life of a loan. This is typically the figure promoted by mortgage companies. It does not include the initial cost of financing. Fees may vary between loan programs and financing companies. For example, there can be points for one loan but not another. Other costs that may be included are origination and services charges.. The APR combines the interest rate and certain closing costs, so it is a better estimation of overall expense.
How to Use APR Information
When assessing a range of loan programs from the same or different lenders, the APR offers an easy comparison. You can be presented with one loan with high fees and another with low fees and a separate interest rate for each. The actual expense includes both the up-front expenses plus what you pay over time. The APR may therefore assist with the analysis.
| Loan Amount | Term | Interest Rate | Up-front Cost | APR |
|---|---|---|---|---|
| 100,000 | 30 years | 5 percent | 1,000 | 5.09 percent |
| 100,000 | 30 years | 4.5 percent | 4,000 | 4.85 percent |
APR Disclaimer
There are some things that borrowers should keep in mind when it comes to APR figures. It is compiled based on the life of a mortgage. If you pay off your loan sooner, the actual APR may be more. Also, one mortgage that appears to have a lower APR than another may end up being higher if the number of years were adjusted. The best APR is not necessarily the better option. Because most home buyers do not retain their mortgage for its entire term, this can be important.
| Loan Amount | Term | Interest Rate | Up-front Cost | APR |
|---|---|---|---|---|
| 100,000 | 5 years | 5 percent | 1,000 | 5.41 percent |
| 100,000 | 5 years | 4.5 percent | 4,000 | 6.12 percent |
Additionally, some APR estimates are not exact. For instance, the interest rate on an adjustable rate mortgage will alter but the amount cannot be predicted. The APR on these loans are calculated using the beginning rate.
Help With The Difference Between Interest Rate And APR For MA Home Loans
To perform a good comparison of your APRs, it is essential to ask for quotes within a short time frame (on same day if feasible) as interest rates are continually changing. Also keep in mind that your actual rate is not determined unless you lock in. Always review the interest rate and APR together to better understand the mortgage and associated costs. An experienced loan officer can provide further guidance on the difference between interest rate and APR for MA home loans.