Loan Information August 30, 2023

Do you know the difference between interest rate and APR?

Do you know the difference between interest rate and APR? These two items are key terms to know when researching mortgage loans. Here are their definitions:

Interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. This is important to note when comparing quotes for different loans since it directly affects your monthly payments.

Annual Percentage Rate (APR) describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, or more simply, it is a finance charge expressed as an annual rate. The APR is a broader measure of cost to you of borrowing money, and reflects not only the interest rate but also the points, broker fees, and other charges that you have to pay to get the loan, including some of your closing costs. For that reason, your APR is usually higher than your interest rate. The APR can help consumers understand the differences between the interest rate and the fees paid at closing. This was established as a part of the Truth in Lending Act.

How APR is determined:

To calculate the APR, the fees required to finance the loan are added to the interest rate. These are able to be combined by amortizing (paying off debt in regular installments over a period of time) the fees over the course of the loan, and calculating a new rate.

Thanks to Trent Riggs for the update on interest rates and APR.  He can be contacted directly at the address below if you have further questions on this article.