The annual percentage rate (APR) and the interest rate on a personal loan are related but do not represent the same thing.

The interest rate on a personal loan means the cost of borrowing the principal amount. In other words, it is the advertised rate that borrowers use when calculating the interest expense on the loan.

There are times you’ll need to evaluate the cost of the credit line or the cost of a loan. That is where the annual percentage rate (APR) comes in. APR will include the interest expense on the loan, different fees, and other costs that you might incur when procuring a loan.

Some of the fees include closing costs, broker fees, discount points, and rebates – all expressed as a percentage.

Mortgage Interest Rate vs APR

Here is the secret when it comes to plain mortgage interest rates:

The lower the interest rate, the better – Your interest rates affect your monthly payments. The lower the rate, the less you pay every month. The more the interest, the more you are going to pay. That means the cost of interest will eventually increase the cost of whatever thing you’ll have bought with the loan awarded.

Keep Your Old Credit Account

Every now and then, you will be tempted to close your first credit account simply because you are opening a new one. This isn’t a good idea.

The length of your credit history constitutes up to 15% of your credit score. Longer credit histories are usually considered to be less risky than the shorter ones. This is based on the fact that there is adequate data that will be used to determine the history of payment.

Most lenders prefer applying interest rates monthly rather than annually. A good example is standard mortgage loans. To make it clearer, assume you have secured a mortgage loan totaling $100,000 charged at 5% interest.

Using the simple interest formula: Interest = (Interest Rate/100) X Principal Amount.

The interest payable at the end of the year:

Interest amount = 5100 X $100,000 = $5000 at the end of the year.

But, you are required to pay part of the amount monthly. So, each month, you’ll be required to pay 1/12 of 5000, which is about $400.

The Case is a Little Different When it Comes to APR

Unlike the regular interest rate, APR is usually quoted yearly. It includes the interest you pay, not only the principal amount but also on the cost related to funding the loan. In short, mortgage interest rate vs APR comparison gives you the cost of borrowing the loan. That way, it enables borrowers to make a good comparison among lenders.

When it comes to APR:
  • The lower the APR rate, the better the loan – The lower the APR, the lower the cost of securing the mortgage loan. But there are exceptions to that rule.
  • APR will help you compare loans – One lender might be charging a higher interest rate with no closing fees. In another situation, a lender may be charging low rates but require you to make a payment of several hundred dollars upfront. In this case, APR will help you determine the loan that works best for you.
Some of the closing costs for a mortgage loan you might encounter along the way include:
  • Application fees
  • Origination fees
  • Discount points
  • Other financing fees
  • Private mortgage insurance (PMI)

Some fees, however, like credit report fees, are not included in the APR calculation. But, they still add to the cost of getting the loan.

The bottom line is, anytime you want to secure a loan, you have to take a closer look at the mortgage interest rate and apr of several lenders and compare them to find the best deal for you.

When you’re ready to buy a home, it’s hard to know what your best options are financially. There’s a lot of information out there. Understanding it all can be challenging. We’re here to help, and can provide some answers to your mortgage questions. Acquiring a mortgage is a big step, and we’re helping people just like you reach their home-ownership dreams. Contact us today!

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