- APR – a combined percentage of interest rate, fees, and other costs
- Interest Rate – percentage of the principal loan charged for borrowing money
- Understanding APR vs Interest Rate can help you pick the right home loan
Home buyers searching for their dream home come across a lot of terms and percentages to make a decision about their loan. Knowing the difference between an APR vs interest rate home loan will help you make an educated decision.
What is the APR?
An APR (Annual Percentage Rate) is a wider demonstration of the cost of borrowing money. It not only includes the interest rate but fees, points, mortgage insurance, and more. This means it’s generally higher than the interest rate for a home loan. APR helps show the total cost of a loan. Basically, it will show a truer picture of how much you will pay for the full life of the loan.
What is the interest rate of a home loan?
An interest rate is “the cost of borrowing the principal loan amount.” Depending on your loan program the rate will be fixed or adjustable. Like APR, it’s always expressed as a percentage. One of the biggest benefits of an interest rate is using it to calculate your monthly mortgage payment.
Understanding your monthly payment combined with your total loan, thanks to APR, will help you find the perfect home loan.
Is APR better to look at than interest rates?
It’s not enough to make a decision on your mortgage with just understanding either interest rates or APR, it’s best to know both. Otherwise, you run the risk of having a loan that’s not the best fit for you.
Don’t pit APR and interest rates against each other. Rather, compare interest rates to other interest rates and the same for APR. Think of the APR as the pie and the interest rate as a piece. They are both parts of the same whole.
APRs should also be compared between one another because they can change depending on the loan program. For instance, APRs for fixed-rate loans are steadier. Since adjustable rate loans are based on future market predictions, these rates can’t be nailed down—they might not include the highest possible rate.
Let’s start with an example. Hint: It’s all about timing.
In the chart below there are 3 different options for the same loan amount. The biggest change is from 3 years to 10 years. In this scenario, it’s better to have a higher interest rate and APR if you don’t plan to stay in the home for the full life of the loan. If you do plan to stay in your home for a long time, the option with higher fees and a lower APR could be the way to go.
What about some of the other elements in APR?
Mortgage insurance is normally used on loans when the buyer doesn’t have 20% or more equity (or down payment) in their home. Depending on your loan program you may or may not need Mortgage Insurance. Therefore don’t compare APRs between loans with and without mortgage insurance.
Points are also important to consider. Remember our conversation about timing? If your break-even on the points in 8 years but you walk-away from the loan in 6, then you lose money.
So where do you go from here?
There are a lot of different factors that go into calculating APR. However, you aren’t in this alone. Talk with your On Q Financial Mortgage Consultant to discuss your options and find the best solution for you.