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Mortgage APR vs Interest Rate Differences
Understanding the difference between the mortgage APR vs rate is particularly important if you’re a home buyer or you deal with anything related to buying home. Otherwise, you will end up paying a lot more money than necessary.
- The basic difference between the interest rate and APR mortgage is the former is always expressed in a percentage and the latter is expressed as a broader cost of borrowing including the broker fees, discount points, closing costs etc.
- In simple terms, if you’re someone who is worrying about the monthly payment, you should focus on the interest rate because the interest rate decides the monthly payment. On the other hand, if you’re worried about the total cost of the mortgage, then you should pay heed to APR (Annual Percentage Rate). If you want to reduce the total cost, try to reduce the APR, otherwise, try to reduce the interest rate.
- Every homebuyer should look at the interest rate first and then see the discount points (if any) and the fees. And after taking into the interest rate plus the discount points and the broker fees, the homebuyer should calculate the APR. APR will always be more than the interest rate. And that’s why looking only at the interest rate would be imprudent at the time of the purchase.
- Another thing that you need to consider while looking at the mortgage APR vs interest rate is the time horizon. If you want to stay in a newly purchased home for a long time, let’s say for more than 40 years, it makes sense to go for the lowest APR possible. But if you’re taking a home loan just for a short stint, then it’s better not to pay any upfront cost and go for the higher interest rate and also a higher APR.
But if you’re not sure how long you’ll stay in that house, do a breakeven analysis. By finding out when you’ll have no profit, no loss, you will be able to plan better. The funny thing is the lenders will not share the information with you about the break-down of APR if you aren’t aware of it. As a homebuyer you need to ask about the total cost of the loan and how much interest you need to pay. Along with that ask for the broker fees, discount point, and closing costs. If you talk to various lenders, you will see each lender has their own set of expenses, fees etc.
Mortgage APR vs Interest Rate Infographics
Here we provide you with the top 5 differences between Mortgage APR vs Interest Rate
Mortgage APR vs Interest Rate Key Differences
The key differences between mortgage APR vs Interest Rate are as follows –
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- If you’re taking the loan for a short stint, you shouldn’t worry about APR, but you should definitely look at the interest rate.
- The focus of the mortgage APR is on the overall cost of the loan. The focus of the interest rate, on the other hand, is on the monthly payment.
- The mortgage APR includes the interest rate, discount points, broker fees, and closing costs. The interest rate talks about how much interest the borrower needs to pay.
- The mortgage APR includes the upfront costs. The interest rate calculates the amortization of loans.
- The mortgage APR may vary, but the interest rate will always remain constant.
Mortgage APR vs Interest Rate Head to Head Differences
Now, let’s look at the head to head differences between mortgage APR vs interest rate.
Basis for comparison between Mortgage APR vs Interest Rate |
Mortgage APR |
Interest Rate |
Meaning |
Mortgage APR is the overall cost of the loan. |
It is the applied interest rate on the loan. |
Accounts for |
Mortgage APR accounts for closing costs, broker fees, discount points etc. |
Interest rate accounts for calculating amortization. |
Does it change? |
It may change if you go for refinancing or reselling. |
It will remain constant. |
Time horizon |
If you look for a long-term stay in your newly bought home, go for lowest APR. |
If you would stay for a short-stint, look for a lower interest rate. |
Emphasis |
The emphasis is on the overall cost of the loan. |
The emphasis is on the monthly payment. |
Conclusion
It’s wiser to see through the mortgage APR vs rate while taking a home loan. You will find that the interest rate is constant for all of the lenders, but the mortgage APR will be different. Since the mortgage APR includes costs that are variable for different lenders, the mortgage APR would vary.
Thus, first think about what you want (stay for a short-stint or a long-haul), look at all the minute details, calculate the mortgage APR vs interest rate (if they’re already not given to you), and then decide.
Recommended Articles
This has a been a guide to the top difference between Mortgage APR vs Interest Rate. Here we also discuss the Mortgage APR vs Rate key differences with infographics, and comparison table. You may also have a look at the following articles –
- Top Breakeven Analysis Examples
- What is the Cost of Refinancing?
- Simple Interest Formula
- Simple Interest vs Compound Interest – Differences
- Bid and Ask – Key Differences
- Dividends vs Growth – Key Differences
- Rate Function in Excel
- What is Internal Rate of Return?
- What is Simple Interest
- Interest vs Dividend
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