What is the Difference Between an Interest Rate and APR When Buying a Home?
The many costs associated with buying a mortgage often leave new buyer’s heads spinning. Between closing costs, interest rates, and additional fees, how do you stay on top of everything? The more you understand the different terminology of mortgages, the better equipped you’ll be to make smart choices about your money when buying a house.
One of the most confusing aspects of choosing a mortgage is understanding your interest rate and annual percentage rate (APR). This guide will break down the differences between each so you’ll be ready to find the best mortgage deal.
Interest Rates and APR Defined
When you choose to buy a home, you’ll likely get financing from a mortgage lender or bank. The lender generally will pay for a percentage of the loan, and you agree to pay this amount back with interest over a specific period of time. Your interest rate is the amount of interest you’re accruing on your home mortgage each year.
That means when you pay your mortgage every month, you’re paying a portion of the principal, or the amount you originally borrowed, as well as the interest you’ve accrued for that month. With that in mind, the longer the length of your loan, the lower your monthly payments and the more you’ll pay in interest.
Your interest rate is not the same as your APR, or annual percentage rate. While we’ve just defined your interest rate as the amount you’ll pay to borrow your mortgage loan, this doesn’t include any other fees or charges that come along with having a mortgage.
Your APR is both the cost of your loan as well as additional fees. Your APR will include the cost of mortgage insurance, loan originator fees, discount points, and more. That means you don’t want to only look at your interest rate when shopping around for a mortgage. Your APR will give a much clearer picture of how much you’ll owe on a monthly basis.
How to Compare Mortgage Rates
Now that you understand how interest rates and APR differ, you’re in a better place to compare mortgages to find the best fit for your budget. The best place to find all of this information is on your loan estimate. Your loan estimates from all of your lenders will look the same since it’s a regulated government document.
You’ll find your loan interest rate under your section for loan terms, and you’ll need to read on further to find your APR under the comparison heading on the third page of your loan estimate document. When deciding two similar loans, it’s a good idea to jump to the APR. This will help you land the best deal.
In general, APR provides a clearer picture of which lender is charging you more. However, always do your best to research any additional expenses that might not be included in your APR such as property surveys or title insurance. It’s also important to note that APRs on adjustable-rate loans won’t show the maximum interest rate possible, so this could be misleading.
If you want a lower monthly payment, pay the most attention to the interest rate. If you’re more concerned about the overall cost of your loan, focus more on your APR. Of course, this is not a one-size-fits-all solution. Take all aspects of the mortgage application process seriously to make sure you know what you’re getting yourself into. Your mortgage is likely the biggest financial agreement you’ll ever enter. Don’t take it lightly!