Ljubaphoto/Getty Images: Islustation by Issiah Davis/Bankrate
When buying a mortgage, it is difficult to know how to compare true apples and apps. Understanding the distinction between loan interest rates and annual rates (APR) can make you a more savvy mortgage shopper and save money along the way.
The difference between APR and interest rates
Interest rate vs April
Expressed as percentages, both the annual percentage rate (APR) and mortgage interest rates provide a benchmark to compare the various loans and their costs. The important difference is that interest rates are always lower than APR.
Consider a 30-year fixed-rate mortgage at $300,000 with 7% interest, with a 1% origination fee ($3,000) and one mortgage point ($3,000 more) totaling $6,000 in fees, with a total of $6,000. That extra cost will be 197% April 7.17%.
What is interest rate?
The interest rates associated with a mortgage reflect the costs you pay to fund your home. Let’s say you get a 30-year fixed-rate mortgage with a 7% interest rate of $340,000. At the 30-year rate, you’ll pay $474,330 in interest in addition to the $340,000 loan itself.
This sounds like a lot, but in this example, you pay the same mortgage payment every month. A portion of each payment will be of interest to the $340,000 (Lone Principal) borrowed and another portion. At the start of your loan, you will pay less towards the principal and more towards profits. Once the mortgage is amortized, the fee itself remains the same, but payments will gradually begin to cover more principal and lower interest.
How is interest rate calculated?
Interest rates are determined in part by factors that are entirely out of your control, such as inflation, the broader economic situation, and the lenders you choose to cooperate with. Due to these factors, mortgage rates are constantly changing. Every time the rate goes up and down, it affects the home you can afford.
Certain mortgage rates are based on credit history and score, debt income (DTI) ratio, down payment size, and other financial data. Generally, the higher your credit score, the lower your interest rate.
How to get a low interest rate
Getting a lower interest rate will save you short-term savings by reducing monthly payments, but you can save money over the lifespan of your loan. Here are some tips to help you get a lower interest rate:
- Buy mortgage points
- Improve your credit score
- Pay a bigger down payment
- Pay off or eliminate high-profit debt (improve the debt-to-revenue ratio)
- Get your first home buyer loan (if you are eligible)
What is APR?
APR represents the annual rate. This represents your mortgage cost and includes interest rates and other fees such as:
How is APR calculated?
There are three important figures to determine your mortgage APR. These are the points you choose to pay interest, fees and advance payment. Using Bankrate’s APR calculator, you can feel how different fees and points affect the overall cost of your loan.
Mortgage Interest Rate vs APR Example
Here is an example comparing interest rates with April on a $300,000, 30-year fixed-rate mortgage.
| interest rate | 6.8% | 6.95% | 7% |
|---|---|---|---|
| Origination fee | 1% ($3,000) | 1% ($3,000) | 1% ($3,000) |
| Discount points | 2 ($6,000) | 1 ($3,000) | 0 |
| Points and fees | $9,000 | $6,000 | $3,000 |
| April | 7.092% | 7.147% | 7.099% |
| Monthly payments (principal and interest) | $1,956 | $1,986 | $1,996 |
| Total Interest | $404,075 | $414,907 | $418,524 |
Tips for comparing interest rates with April
- APR offers better ideas about the actual cost of a loan. APRs include fees, so comparing APRs will give you a better understanding of what you actually pay.
- Shop for loan offers before you choose a lender. Some lenders may advertise low interest rates, but may charge a higher upfront fee. Others may charge more interest, but don’t charge them. You can spend time reviewing mortgage lenders and comparing offers, saving you money over the life of your mortgage.
- Be careful of comparison Mortgage and arm fees have been fixed. The rate cited for the arm is an introductory rate, which is fixed only for the set period. This means that after that period, your fees may go up and your payments may go up too. Fixed-rate mortgages hold the same rate, so principal and interest payments remain the same each month.
- The arm APR does not reflect the maximum interest rate on the loan. Once the adoption rate is over, the rate could be significantly adjusted depending on the market and the rate cap of the arm.
