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Difference Between APR and Interest Rates

The Difference Between APR and Interest Rates

When you are comparing mortgage options, it is important to understand the difference between APR and interest rates. When you see a loan rate advertised, you’ll also see a corresponding APR (4.5%/4.762% APR). This Annual Percentage Rate is the total cost of your loan (interest and fees) expressed as a single number. The purpose is to give you one number for comparing multiple loans.

But it’s an imperfect science.The problem with using APR as designed is that the calculation applies to the entire length of the loan, and some people use mortgage loans for only a few years due to refinancing or sale.

So be careful with your comparisons. Using APR for comparison can become misleading. Below, you can see the low APR option would cost over $1,500 extra if used only three years. In the fifth year, the lower APR begins to pay off with a savings of a little over $500.

The Difference Between APR and Interest Rates

Here’s a quick tip… The bigger the difference between the rate and the APR, the more likely it is that you will be paying higher fees. This is great to know when you see a really low rate advertised. An APR that’s anything more than a quarter of a percent or higher than the actual rate is an indication that the closing fees are going to be more.

Another way of looking at this example is to ask yourself whether you prefer $3,000 of savings in the bank or a payment that’s $30 less per month. If you are more comfortable with money in the bank, lean toward lower upfront costs. If you are more comfortable with the lowest possible payment and believe you’ll use the loan for five years or more, then the lower APR alternatives make sense.

Although reviewing loan options may seem daunting, as long as you choose an experienced and trustworthy Mortgage Consultant you will have an expert to walk you through the process and the difference Bbetween APR and interest rates.

At Marketplace Home Mortgage, L.L.C., we pride ourselves on helping you make a truly informed decision, so that you can choose the loan that is right for you. To get started, find a branch near you.

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