What's the difference between interest rates and APR? This is one of the most commonly searched mortgage terms!
Real estate has its own language. While first time home buyers might be overwhelmed by all the steps and requirements involved in purchasing their dream home, the addition of foreign terminology that’s casually tossed around could push their frustrations to a breaking point.
That’s where we come in. The team here at Coldwell Banker Rizzo Mattson Realtors wants each of our clients to be “in the know” and have all the tools needed for beneficial decisions right at their fingertips.
So, What IS the difference between interest rates and APR?
First things first: interests rates.
They're pretty simple. A bank charges a fee (interest) when you borrow money for your mortgage. You will pay back this fee (which can be variable or fixed) as you pay off the loan. It's always expressed as a percentage.
But what about APR?
APR isn't as confusing as you might think. In fact, its name gives away its function. It's an acronym for "annual percentage rate" and tells homeowners what the yearly cost of credit is, but in percentage form.
It also includes certain fees (like broker fees, discount points, and some closing costs) in its calculations to express the cost of interest in addition to the credit.
Why do I need to understand both?
Your interest rate will determine the cost of the monthly payment, while the APR reflects the total cost of the loan.
If you plan to spend many years in your new home, like raising your kids or retiring there, then you should pay closer attention to obtaining a low APR as the long term costs will be more important for the length of the time spent in the home.
However, if you see your new purchase as a short-term investment (i.e. you know you’ll be moving again within a few years), you should be focusing on securing a mortgage with a lower interest rate rather than worrying about the APR. This is because the initial costs will be lower, as you’re not trying to save money “in the long run” since you won’t be living in the home for years to come.
That said, you should always work with a lender who can analyze your unique financial situation and help you find a solution that fills your specific needs.
Looking for a new home? Contact us today.