If you’re planning to borrow a home loan, chances are you’ve come across the entire interest rate vs. APR debate. While both interest rate and annual percentage rate (APR) are frequently conflated, there are some key differences you should keep in mind.
Here’s a closer look at interest rate vs APR, and which one is suitable for you:
What is Interest Rate?
The nominal interest rate, simply known as the interest rate, is the price you pay to borrow money. It is charged annually and represented as a percentage of the total amount. For instance, if you borrow $10,000 with a 5% interest rate, you’ll pay $500 in interest annually. Most lenders offer two types of interest rates:
Fixed Interest: A fixed mortgage comes with a set interest rate that stays the same throughout the duration of the loan. Most lenders prefer fixed-interest loans since they are more predictable and ensure better financial planning.
Variable Interest: A variable mortgage or an adjustable mortgage comes with an interest rate that can change. In simple terms, your mortgage payments can go up and down depending on certain predetermined conditions.
When it comes to interest rates, there is no one-size-fits-all approach. Lenders, such as AmeriSave, primarily focus on the borrower’s creditworthiness. High credit score, low debt-to-income ratio, and favorable payment history increase your chances of acquiring a low-interest home loan.
Lastly, in some cases, 0% APR is possible. Some lenders offer 0% APR for the introductory period and increase it afterward. Always pay attention to your lender’s policies to ensure transparent loan terms.
What is Annual Percentage Rate?
The annual percentage rate (APR) is pretty straightforward. APR is the sum of your interest rate and any additional costs that the entire process might incur.
Here’s a list of fees typically included in APR:
Broker fees – the fees paid to the mortgage broker
Underwriting fees – the cost paid to the lender to evaluate and approve your loan application
Administrative fees – the fees paid for certain administrative tasks
In many cases, private mortgage insurance (PMI) and discount points are also included.
Which Fees Aren’t Included in APR?
Here is a list of fees that aren’t part of the APR calculation:
- Title insurance
- Home inspection fees
- Notary fees
- Credit check fees
- Recording fees
- Escrow fees
Interest Rate vs. APR: Key Differences
Understanding the difference between interest rate and APR is quite easy. Your interest rate is the percentage that the lender charges you for borrowing money. In comparison, the annual percentage rate (APR) includes everything from administrative costs to broker fees. Keep in mind that the APR is always either higher or equal to the interest rate.
The factors impacting your interest rate and APR can also vary. For instance, the interest rate mainly depends on your credit score and financial history. In comparison, the APR is controlled by the lender, especially broker fees and discount points.
Lastly, in some cases, 0% APR is possible. Some lenders offer 0% APR for the introductory period and increase it afterward. Always pay attention to your lender’s policies to ensure transparent loan terms.
When choosing a mortgage lender, analyze both interest rate and APR to avoid any unfortunate financial circumstances later on.
