APR vs. Interest Rate

When it comes to financing a home, many people focus on the interest rate, but it’s important to also consider the annual percentage rate (APR). While the interest rate determines the cost of borrowing the money, the APR takes into account other fees and charges associated with the loan, giving you a more accurate picture of the total cost.

One of the main advantages of APR is that it allows you to compare different loan options on a level playing field. For example, if two lenders are offering mortgage rates of 3.5% and 4.0%, respectively, you might assume that the 3.5% rate is the better deal. However, if the lender with the lower rate charges higher fees or points, the APR could be higher, making the 4.0% rate the better value.

Another reason why APR is more important than interest is that it helps you understand the true cost of borrowing over the long term. For example, let’s say you take out a mortgage with a 3.5% interest rate and a 15-year term. While the monthly payments might be lower compared to a higher interest rate, you could end up paying more in total due to the longer repayment period. By contrast, a mortgage with a higher interest rate but a shorter repayment period could have a lower APR, even though the monthly payments are higher.

APR is like the sticker price of a car. Just as the sticker price includes the base price of the car as well as additional fees and charges, the APR includes the interest rate as well as other fees and charges associated with the loan. As you can compare the sticker prices of different cars to find the best deal, you can also compare the APRs of different loans to find the one with the lowest cost.

But remember: the sticker price doesn’t always reflect the true cost of the car if you are financing it and paying it off over a period of time. The same is true about APR; it doesn’t always reflect the true cost of the loan if you are paying it off over a long period of time. So it’s important to work with a professional that can help you navigate through the sea of options out there. (That’s where we come in)

In short, while the interest rate is an important factor to consider when financing a home, it’s equally important to look at the APR to get a complete picture of the total cost of the loan. By understanding the APR, you can make an informed decision about which loan option is best for your needs and budget.

To ensure that you make the best decision possible for your situation, contact our office and we’ll walk you through it all.

(801) 900-6416