One important thing you’ll need to know when shopping for a mortgage or if you’re looking to refinance your mortgage, is how to compare a mortgage interest rate and an annual percentage rate (APR). When searching for loan, you might become overwhelmed with all of the terminology. But don’t worry if you’re not sure how to define APR vs. interest rate because you’re not alone. Once you learn the difference between the two, you’ll be better prepared to start shopping for a loan.
So, what’s the difference?
Interest rate – refers to the annual cost of a loan to a borrower and is expressed as a percentage. The interest rate only includes the interest percentage you will be charged for borrowing the money; it does not include any other fees you might be required to pay on the loan, such as origination fees, closing fees, documentation fees, and other finance charges.
APR – stands for Annual Percentage Rate and is the annual cost of a loan to a borrower including fees. Like an interest rate, the APR is expressed as a percentage. The APR of a loan gives you a more comprehensive look at how much you’ll pay when you borrow money for a loan. However, unlike the interest rate, it includes origination fees, closing fees, documentation fees, and other finance charges. The APR is typically higher than the mortgage interest rate and is not used to calculate your monthly payment.
When shopping for a mortgage, make sure to look at not only the interest rate and APR, but also the other costs of the loan that aren’t included in APR. Ask UKRFCU how we calculate the APR and what costs are included.