Do you know the difference between an Interest rate and an APR and why it’s important to know what an APR represents when you’re buying a home?

The difference between APR and interest rate is this: the APR (annual percentage rate) is not an interest rate but rather is a marker that illustrates the total cost of the loan including the interest rate and fees. An interest rate is just the amount of interest the lender will charge you for the term of the loan. The APR is a tool to use to determine how much the loan will cost you. For years, we’ve advised borrowers to shop a mortgage around and ask for the APR to help make an evaluation.

The APR will always be higher than the interest rate. It works like this: if you get an interest rate of 2.99%, for example, from two lenders and one has an APR higher than the other lenders,  this means there are more closing costs being added to the loan with the higher APR. In other words, the APR will include what it costs the borrower to get that rate.

A lender with a lower interest rate is not always the best deal for a borrower if it costs thousands of dollars to buy it down; that will show up in the APR. The farther away the APR is from the actual interest rate, the more it is costing to get that rate. Online and out-of-state lenders are notorious for offering low rates but never want to disclose the APR and hope the borrower never looks.

Asking for the APR is a great tool for consumers to shop their mortgage around and compare various mortgage lenders. If we can help in the financing for your new home or a refi, please call us as one of your choices for a mortgage loan.