Q: What’s the Difference Between Interest Rate and APR?

Updated: Jul 30, 2020

Here’s the difference between APR and your actual mortgage interest rate.

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When you’re trying to secure a home loan, what’s the difference between your interest rate and the APR? This is a question that comes up pretty regularly, so we figured we’d cover it for you today.

The easiest way to describe this is that your interest rate is what’s going to break down for your monthly payment. That is going to be your principle, interest, taxes, and insurance. The interest rate will determine how much interest is charged on that loan.

Right now, 30-year loans are ranging from about 3.5% to 3.75%. 15-year loans are about 0.75% lower than that. That rate will be the monthly interest you pay.

Now, what’s APR? APR stands for Annual Percentage Rate. While the interest rate takes into account how much interest you’re charged, the APR takes into consideration all the potential fees, discount points, etc., that are all-encompassing in order to get you that loan.

If you plan on staying in your home for just a few years, the APR might mean more.

You should always see an APR that is higher than your interest rate. What does that mean?

If you’re shopping for a loan or refinance, sometimes you’ll see teaser rate loans, only the APR might be higher than someone else’s loan. You might see a loan that says 3.5%, but it has an APR of 3.9%. You might also see a 3.625% rate with an APR of 3.75%

In that situation, the lower APR may be the better bet for you.

This is a fantastic reason to sit down with a mortgage professional and go through your options. If you’re planning on keeping your house for just a few years, APR might mean more than your actual interest rate. If you’re someone who wants to keep your home and pay it off for 30 years, that rate is going to affect that monthly payment.

In simple terms, your interest rate determines your monthly payment, while your APR determines your overall loan costs.

If you have any questions for me about today’s topic or anything else related to real estate, don’t hesitate to reach out via phone or email. I look forward to hearing from you.

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