Annual Percentage Rate (APR)
Annual percentage rate (APR) and interest rate are similar terms, but have different definitions. The annual percentage rate is how much total interest you’ll pay on the mortgage, divided by the years you’ll have the mortgage. In general, annual percentage rate is a great tool for figuring out how much will be paid per year, and even per month, on a home loan.
On the other hand, interest rate is simply the current costs of investing, which may change from year to year or even month to month. Annual percentage rate allows borrowers to see exactly what their base payments will be, and then add on other costs, like lender’s fees, to see what the actual cost of the mortgage will be.
The common thought is that the lower the APR, the lower the monthly payments. However, this is not always the case. Banks will often tack on “mortgage points,” which is paid directly to the lender in exchange for a lower APR, as well as other fees. A higher annual percentage rate may cost more over the life of the mortgage, but in the short run may free up cash for appliances, furniture, repairs and other home-buying costs.
Annual percentage rate is only one part of determining the cost of a mortgage and finding the right loan. Borrowers should also take into consideration down payments, home maintenance costs, closing costs and other expenses. A qualified real estate agent can assist in calculating exactly how much owning a home will cost.