Understanding Interest Rates and APR

Understanding Interest Rates and APR

Contra Costa County Real Estate | East Bay Homes

Understanding Interest Rates and APR

Many people don’t  know the difference between interest rate and APR, which are important concepts when buying a home. Understanding how interest rates and APR work can help you select the best loan package available.

Whether you are evaluation the line of credit or cost of loan it is essential to understand the difference between annual percentage rate (APR) and advertised interest rate. Here we have everything you need to know to help you with understanding interest rates and APR.

Interest Rates

The interest rate only refers to the cost you pay for borrowing the principal loan amount from a lender.

It’s also known as the nominal interest rate or advertised rate. If you’re applying for a mortgage loan worth $200,000 with a flat 6% interest rate, then your monthly payment of interest will be $1000 and annual interest expense will be $12,000.

APR

APR is a more effective tool for comparing loans, because it reflects a truer picture of what you pay. The interest expense as well as any other costs that will be repaid with the loan are included in APR. The APR may be comprised of the loan interest and :

  • Closing costs
  • Broker fee
  • Rebates
  • Discount points

These expenses are commonly expressed as a percentage. The APR % is always greater than or equal to the nominal interest rate. The only exception is when the lender has a special deal in which they offer a rebate on part of your interest expense.

Consider if you were buying a house that also required mortgage insurance, had closing costs and a loan origination fee which together totaled $5000. To calculate the APR of that mortgage loan, you would add the other costs to the original loan, creating a new loan value of $205,000. With a 6% interest rate, you would have a $1025 monthly or $12.300 annual loan expense.

Some Key Facts

Here we have some important facts that makes understanding interest rates and APR easier.

  1. Interest rate is the cost of borrowing the loan.
  2. All the costs associated with borrowing the loan are included in APR.
  3. According to Federal Truth in Lending Act, the APR in must be disclosed in your loan agreement along with the nominal interest rate.
  4. Being able to see the total loan amount and APR means that you can accurately calculate your future monthly payments.

There’s no need to let interest rates and APR confuse you. If you have any questions about home buying, our team at Laura Wucher Real Estate can always either answer your questions or find someone who can.

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