By Jennifer Tucker?
September 3, 2024 | 1 Min. Read
When you’re applying for a home loan, you’re likely to hear a lot about interest rates and annual percentage rates. The numbers can be confusing, but it’s important to understand how the two differ and how they affect your home loan.
Interest rate and annual percentage rate (APR) often get confused. So, what’s the difference between interest rate and APR?
Interest rate is the percentage of the loan amount charged by the lender against the principal amount of the loan. A lower interest rate typically means lower monthly payments, while a higher interest rate means higher monthly payments. The interest rate can be fixed (meaning it remains the same over the length of the loan) or adjustable (meaning it can change periodically).
Annual percentage rate (APR) reflects the total cost of borrowing, including fees, expressed as an annualized percentage. The APR provides a more comprehensive picture of the cost of the loan. Unlike interest rate, APR takes into account other costs such as mortgage insurance, most closing costs, and loan origination fees.
When you’re shopping for a mortgage, it’s important to keep in mind that an advertised interest rate isn’t the same as your loan’s annual percentage rate (APR). Your monthly mortgage payment will be based on the interest rate, not the APR. Be sure to compare both the interest rate and the APR to get the full picture and make an informed choice that aligns with your financial situation and goals.
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