How is APR different from Interest Rate?
How is APR different from Interest Rate?
The interest rate on a home loan refers to the cost of borrowing money, expressed as a percentage of the loan amount, and it only accounts for the loan's annual cost.
The APR (Annual Percentage Rate), on the other hand, includes not just the interest rate but also other fees and costs associated with the loan, such as origination fees, discount points, and closing costs. APR gives you a more complete picture of the total cost of the loan over a year.
Lenders typically charge several fees when you take out a mortgage. Common fees include:
- Origination Fee: A fee for processing your loan application, usually around 0.5% to 1% of the loan amount.
- Underwriting Fee: Covers the lender's cost of evaluating your creditworthiness and loan risk.
- Application Fee: Charged upfront to process your loan application, though not all lenders require this.
- Discount Points: Optional fees you can pay upfront to lower your mortgage interest rate, with each point typically costing 1% of the loan amount.
- Appraisal Fee: Paid to an independent appraiser to assess the value of the property, usually $300 to $500.
- Credit Report Fee: A small fee charged to pull your credit report, generally around $25 to $50.
- Title Fees: Charges for a title search and title insurance, ensuring the property has no ownership issues.
- Prepaid Interest: Covers the interest that accrues between your closing date and the start of your first mortgage payment.
These fees can vary by lender, so it’s important to review your loan estimate to understand the exact costs.
In short, the interest rate shows the cost of the loan itself, while the APR reflects the overall cost, making it easier to compare different loan offers. So just because your interest rate is lower, it doesn't mean that you are "getting a better rate".
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