What is the difference between APR and my mortgage rate?


What is the difference between APR and my mortgage rate? This is one of the most common questions about the mortgage lending process. If you are in the market for a home loan, it is helpful to learn the difference between your mortgage rate and your annual percentage rate, or APR.

Let’s start with your mortgage rate. That’s the base rate you will be charged to borrow the money needed to buy your home. This is the rate that directly affects your monthly payment and the one you will want to brag about to all your friends.

Your APR, on the other hand, is the rate the federal government requires lenders to calculate and provide to consumers. It takes into account your interest rate and certain costs required to process and close your loan.

The idea behind APR is to help consumers more accurately compare rates among different lenders and loan products. For example, a home loan with closing costs may have the same APR as a loan with a higher mortgage rate but no closing costs.  Most costs on your closing are either set fees or third party fees.  The thing to look for is if there is a grave difference between the rate and APR.  For example, if the rate is 4% and the APR is 6%, then it is likely there are high origination fees, or points.

Points are pre-paid interest, and allow you to get a lower rate.  Like anything in life, if the rate is super low, and sounds too good to be true, it probably is.  The APR will reflect this.

Many first-time buyers are shocked at closing to see a higher rate than they had expected. But look carefully. At closing, you should see both your APR and your actual mortgage rate on your loan documents.  Your actual mortgage interest rate is what your payments are based on, and are the true rate you will be paying back over time.

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