Refinancing
What's the Difference Between APR and Interest Rate?
What's the Difference?
Your interest rate is what you pay each month based on the amount you still owe on your loan. The Annual Percentage Rate (APR) is a bit different. It includes your interest rate plus other costs, like mortgage insurance, processing fees, origination fees, and more.
Why was APR Created?
Annual Percentage Rate was created by the US government to help consumers compare loan options easier. However, there are sometimes where it can be misleading. APR is supposed to help show the total cost over the life of a loan; on a car loan, this can be helpful but on a mortgage loan, it often misleads as many people don't have the loan the whole 15yrs or 30yrs (or whatever their term may be).
Mortgage Insurance and APR
If you don't put down at least 20% when buying a house, you'll probably have to pay monthly mortgage insurance. This can really increase your APR.
Be Careful with APR
Shopping for a loan based only on APR can be tricky. Some lenders might use it to confuse you. Here are two examples:
Lower Rates but Higher Fees: Imagine two lenders. One offers a lower interest rate but charges high fees. The other has a higher interest rate but no fees. If you keep your mortgage for a long time, like 30 years, the first lender might be cheaper overall. But most people don't keep the same mortgage that long. They might sell their house or refinance. In those cases, the second lender, with no fees, is often a better deal. APR is almost always cheaper on lower rates (vs higher rates) so many online lenders will show their low rate, with a low APR, with a ton of fees to entice borrowers.
Different Mortgage Insurance Options: If you can't put 20% down, there are different ways to handle mortgage insurance. You can pay it monthly (removed later), pay a single upfront fee, or have the lender cover it in exchange for a slightly higher interest rate. The monthly option usually leads to the highest APR, but it's not always the most expensive in the long run. Click here for our home purchase qualifier where we can shop the best MI quotes for you.
Click here to get your custom rate quote (no SSN or Credit Check Required) - we'll break down interest rates, APR, and help guide on what might be the best option for you.