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Mortgage APR and interest rate: What you need to know

April 10, 2016

Understanding Your Mortgage APR and Interest Rate

Buying a home is one of the most exciting moments in a person’s life. Unfortunately, it can also be confusing when you first get started. Two of the most confusing pieces of homebuying, are understanding the importance of your mortgage APR and interest rate.

What are APR and Interest Rate?

First, let’s discuss what each of these important figures actually are.

Mortgage Interest Rate:

Your mortgage interest rate is the annual cost for borrowing the principal amount of your loan. Your principal amount, is how much your home purchase costs. Your mortgage interest rate is always shown as a percentage and can be either variable or fixed.

Mortgage APR:

As for your mortgage APR, this figure reflects a broader range of cost for your mortgage. The APR includes: closing cost, broker fees, discount points and more. All of these variables are reflected into the calculation. The amount is also reflected as a percentage and is included by lenders to borrowers under the Truth in Lending Act.

Both figures are useful for homebuyers when doing comparisons amongst various properties. If you’re ultimately looking for the absolute lowest rate, then you will want to focus on mortgage interest rate percentage.

On the other hand, if you’re more concerned about the total cost of your loan, then the APR becomes more important. Since this figure reflects a broad calculation of the total cost of your loan and the property you are purchasing, it provides a more accurate picture of what your total borrowing cost will look like.

Another factor to consider with APR is the amount of time the buyer plans to be in their home. If you plan on being in the home for a longer duration, then generally the lowest possible percentage rate is beneficial. The total borrowing cost is as small as possible over the life of the loan in this case. If you don’t plan on being in the home for many years to come, sometimes a slightly higher APR is beneficial, because it often means that there are fewer upfront fees.

There are many things to consider when buying a home and mortgage APR and interest rate are part of it. By knowing the difference between the two and how they impact your total borrowing cost, you can be sure you are getting the most out of your home mortgage.