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Interest Rate vs. APR: Know the Difference

In real estate, you will see these two terms come into play when it pertains to mortgages. Mortgages can have many different aspects to them, whether it be how they are set up or what the different fees are.

What Is the Interest Rate?

Your mortgage interest rate, according to consumerfinance.gov, is the cost you are paying each year to borrow money for your mortgage. In other words, this is the fee that you pay throughout your mortgage to have the financial institution loan you money.

What Is APR?

The APR is the annual percentage rate. It is like the interest rate but includes more fees. Because of this, you will most likely notice that the APR is typically higher than the interest rate. The additional fees that are included in the annual percentage rate are not only the interest rate but the points and additional fees that may be associated with the mortgage.

What Are the Points?

Points are essentially a trade-off or an exchange between the lender and the individual taking the loan. If you pay points, you will be paying additional upfront costs at closing when you buy your home, but over the long run you will be paying a decreased interest rate for paying the points. This is advantageous to those who know they are going to have the loan for a long time and would like to pay reduced interest.

Should I Be More Concerned With the Interest Rate or the APR?

Both should be considered when looking at a mortgage. When you are looking at the interest rate, you are essentially looking at what the monthly payment will be for you, so the lower the interest rate, the lower the monthly payment will be. However, the APR takes into account what the total cost of the overall loan will be over its lifetime. It is important to weigh both, as the APR and interest rate can both give you information that you need to know.

When to Be Concerned With APR?

The annual percentage rate should be taken into consideration the most when you are planning to see a loan out to its full life or just before its full life. This is assuming you are doing a typical 30-year mortgage loan. This is because if you are paying points to reduce your interest rate, you will not see the true benefit until later in the life of the mortgage. Utilizing points can be in your favor as well in both reducing interest for monthly payments and reducing the overall cost of your loan over time.

To discuss current interest rates and APRs in your area and how to go about assessing which mortgage is correct for you, please contact me directly.

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