So, you’ve decided to borrow a home loan. Your first step would be to compare the interest rates you would pay with each mortgage option. But is looking at the interest rate alone truly enough? Not exactly.
To fully understand the terms and conditions of your mortgage, you need to understand the difference between interest rate and annual percentage rate (APR). Here’s a comprehensive breakdown of interest rate vs APR:
What is the Interest Rate?
Interest rate is pretty straightforward. It is the amount the borrower pays to a lender to borrow the amount to purchase a property. The interest rate is calculated as a percentage and determines the amount you’ll pay in addition to the principal amount of your loan.
When it comes to AmeriSave mortgages, there are two types of interest rates:
Fixed Rate: A fixed mortgage rate remains the same throughout the period of your loan. Fixed interest rates are generally higher, as many lenders anticipate that rates will rise in the future.
Adjustable Rate: It changes depending on market conditions and other financial factors.
Many new homeowners opt for mortgages with a fixed interest rate due to their predictability and affordability.
Factors That Impact Interest Rate
Interest rates are hardly random. They fluctuate due to a number of factors, including:
Credit score – A higher credit score generally indicates less risk for the lender, resulting in a lower interest rate.
Loan type – Fixed and adjustable mortgages have varying interest rates.
Loan duration – Longer loan durations, such as 20 or 30 years, typically have lower interest rates, and vice versa.
Debt-to-income ratio – A lower debt-to-income (DTI) ratio indicates you have more disposable income after paying off debt. This can lead to a lower interest rate.
Down payment – A larger down payment indicates a lower debt-to-income (DTI) ratio, and hence, you can qualify for a lower interest rate.
Economic conditions – Economic changes, latest industry regulations, and inflation can have a direct impact on your interest rate.
What is Annual Percentage Rate (APR)
If you’re shopping for a mortgage, pay close attention to the annual percentage rate (APR). APR includes not only the interest cost, but also all kinds of fees associated with borrowing a loan. These fees include, but are not limited to:
- Mortgage insurance
- Broker fees
- Prepaid interest
- Document preparation fees
- Administration fees
- Loan origination fees
- Closing costs
- Underwriting fees
- Appraisal fees
Title insurance, home inspection fees, and notary fees are typically not included in APR.
Annual percentage rate (APR) gives you a more comprehensive and more precise picture of what you’re going to pay.
How is APR Calculated?
Calculating APR is pretty simple. Lenders start with your fixed or adjustable interest rate and add in all types of additional costs. Keep in mind that the APR is always greater than or equal to the interest rate. Like interest rates, APRs also depend upon loan type, duration, and economic conditions.
Pay close attention to the policies and regulations of your lender. Choose a lender that prioritizes transparency and gives you accurate figures.
