Difference Between Home Loan Interest Rate Vs Annual Percentage Rate (APR)
When you apply for a home loan, you will be given an interest rate and an annual percentage rate (APR). Understanding the difference between the rates, and how they are calculated could save you thousands of dollars over the duration of your home loan.
Interest Rate
The interest rate is the percentage of the loan amount that is charged for borrowing the money. It can be fixed or variable, depending on the home loan product. The interest rate calculates your actual monthly payment (principal and interest only), but does not include property taxes, homeowners insurance or any other charges you may have to pay for the loan.
Annual Percentage Rate (APR)
The APR incorporates the lender fees, discount points and many (but not all) other charges you have to pay to get the loan, into the interest rate. This is why the APR is typically higher than the interest rate. The APR is disclosed on the Loan Estimate which you’ll be provided in your initial disclosure packet and again on the Closing Disclosure provided at closing.
The APR is calculated by amortizing the fees out over the life of the loan as if they were additional payments, and then calculating a new rate. To calculate the APR you must do two separate calculations:
Comparing Rates
When comparing a specific type of home loan for example a 30-year fixed rate between lenders, or comparing home loan product options at one lender, you cannot look at the APR alone when comparing the APRs of fixed-rate loans with adjustable-rate loans, or among different adjustable-rate loans. These are different loan products, so you must look at them in context with your short and long-term financial circumstances and length of time you foresee being in that home.
When comparing APR rates, different lenders may include different fees in their APR calculations for various loan programs. Always ask your loan officer what is and is not included in your APR rate.
When you are ready to apply for a home loan contact a Certainty mortgage professional in your state to learn which home loan options best meet your financial needs.
Interest Rate
The interest rate is the percentage of the loan amount that is charged for borrowing the money. It can be fixed or variable, depending on the home loan product. The interest rate calculates your actual monthly payment (principal and interest only), but does not include property taxes, homeowners insurance or any other charges you may have to pay for the loan.
Annual Percentage Rate (APR)
The APR incorporates the lender fees, discount points and many (but not all) other charges you have to pay to get the loan, into the interest rate. This is why the APR is typically higher than the interest rate. The APR is disclosed on the Loan Estimate which you’ll be provided in your initial disclosure packet and again on the Closing Disclosure provided at closing.
The APR is calculated by amortizing the fees out over the life of the loan as if they were additional payments, and then calculating a new rate. To calculate the APR you must do two separate calculations:
- Payment Amount: For example: A $200,000 loan with a 4% interest rate for 360 months (30 years) yields a payment (principal and interest only) of $954.83 per month. Add to this loan amount $4,800 lender fees (prepaid finance charges) for the loan.
- Calculate APR: The prepaid finance charges are subtracted from the loan amount to determine the amount financed, in this example $195,200. The $195,200 amount financed for a term of 360 months (30 years) with the payment of $954.33, results in an APR of 4.198% for your home loan.
Comparing Rates
When comparing a specific type of home loan for example a 30-year fixed rate between lenders, or comparing home loan product options at one lender, you cannot look at the APR alone when comparing the APRs of fixed-rate loans with adjustable-rate loans, or among different adjustable-rate loans. These are different loan products, so you must look at them in context with your short and long-term financial circumstances and length of time you foresee being in that home.
When comparing APR rates, different lenders may include different fees in their APR calculations for various loan programs. Always ask your loan officer what is and is not included in your APR rate.
When you are ready to apply for a home loan contact a Certainty mortgage professional in your state to learn which home loan options best meet your financial needs.