Whether you’re a new home buyer or an experienced homeowner looking to refinance your existing mortgage, figuring out common home loan terms can help you have a better understanding of the process. Perhaps you’ve heard of APR, for instance, but are unfamiliar with the actual meaning behind the acronym.
Fear not. We’ll break it all down for you and explain the difference between the APR vs. mortgage rate so you’re empowered to make the right decisions when it comes to your home loan financing needs.
Mortgage Rate Explained
The mortgage rate is your home loan interest rate. Just as with a credit card or car payment, you are charged an interest rate on the amount you are borrowing to finance your home purchase.
Your interest rate is based on a number of factors, such as market conditions and your creditworthiness. Once you close on your mortgage, you start paying interest on the loan’s outstanding principal balance.
Your interest rate may vary based on mortgage type. For instance, if you have a fixed-rate mortgage, your interest rate will remain the same over the life of the loan. That means your monthly mortgage payments will always be the same amount.
For example, if you take out a 15-year loan term and always make your minimum monthly mortgage payment, you will make 180 monthly payments over the life of the loan, with the last payment settling your remaining loan balance.
On the other hand, you may opt for an adjustable-rate mortgage (ARM). With an adjustable-rate mortgage, your interest rate fluctuates over the course of the loan based on market conditions. Since you have a variable interest rate, your monthly mortgage payment will also vary. Your monthly mortgage payments may be lower or higher from one month to the next. However, most ARMs come with an interest rate cap so your interest rate will max out at that capped amount.
Both ARMs and fixed-rate mortgages have their advantages and disadvantages. It’s best to do your research and speak with your lender to determine which type of mortgage is right for you.
But the mortgage rate shouldn’t be confused with the APR. Some borrowers are understandably stumped when they get to the closing table and find that they’ve been quoted an interest rate of 6 percent, but the APR reflected on the closing documents is slightly higher. Why the difference?
Well, the APR is tied to your loan interest rate, but it’s calculated differently because there are other factors involved. Let’s dive into what an APR is and exactly how it’s computed.
APR Explained
APR stands for annual percentage rate. Whereas your mortgage interest rate is one aspect of your home loan purchase, the APR tends to be more all-encompassing. The APR reflects the overall cost of the loan by taking into account closing costs and other lender fees, for instance.
This is why APRs tend to be higher than the mortgage interest rate itself. The APR factors in other expenses you make toward your home loan purchase to give you a clearer sense of how much you’re actually paying to finance your home.
The Truth in Lending Act (TILA) requires lenders to provide you with certain loan information, including your APR, so that you can compare the loan terms offered by each lender. The APR typically includes your interest rate, lender fees, and origination points.
However, it’s important to note that there are some expenses that may not be reflected in the APR. For instance, title fees, appraisal fees, and escrow payments for taxes and insurance are a few of the expenses exempt from APR computation.
APR vs. Mortgage Rate
Many homeowners look for the lowest possible interest rate when comparison shopping with different lenders. Since home purchases are one of the largest expenses we’ll make in our lifetimes, it makes perfect sense that you would want a low interest rate. But it isn’t the sole factor, or even the most important factor, to consider.
If you want a better understanding of how much your home loan is going to cost you, pay close attention to the loan’s APR. For example, one lender may offer a seemingly competitive interest rate, but it’s contingent on paying discount points at closing that drive up the APR you’re paying. So when comparing lenders, be sure to inquire about the APR in addition to the mortgage interest rate the lender is offering.
You should also ask each lender which expenses are included in the APR and which are omitted. It’s easier to comparison shop when you have a uniform standard, but some lenders may calculate the APR differently from others, so be sure to take that into account. You can also compare lenders using a calculator that will automatically compute the loan’s APR for you.
To use an APR calculator, plug in the loan specifics, such as mortgage amount, loan term, interest rate, origination fee, and points paid at closing. You can also input a flat amount for any other fees you expect to pay at closing. Then hit calculate, and you’ll see the loan’s APR displayed in a matter of seconds.
Shopping in Washington State?
Are you looking for a lender that makes home loan financing that quick and easy? If so, and you’re looking to close in Washington State, get on the fast track to home ownership with Solarity Credit Union.
Solarity offers competitive rates and a streamlined closing experience. Their expert Home Loan Guides will be by your side throughout the process, ensuring you understand every step along the way.
They are big believers in making things as smooth as possible for their members. They’ll help you unlock your home ownership potential so that you’ll be unlocking the door to your new home in no time at all.
