Difference Between Mortgage Rate and APR

Mortgage Rate vs APR
 

Mortgage rates and APR are both information that are provided to a borrower when taking out a mortgage loan. Since both rates are provided to the borrower when applying for a loan, many loan applicants are confused about how these rates are related to each other. The article offers a comprehensive explanation on both mortgage rates and APRs and shows how they are quite different to each other.

Mortgage Rate

Mortgage rates are interest rates that apply to loans that are taken out for the purpose of purchasing homes. Mortgage rates that are applied on loans include the profit that lenders make by offering mortgage loans, and show the extra amount that is repaid, in addition to the loan principal. Mortgage interest is paid with every single principal repayment that is made; however, the interest paid back will depend on the balance of the principal that is yet to be paid. Mortgage rates can either be fixed for the term of the loan or can be flexible. Mortgage rates generally fluctuate constantly and that greatly affects the real estate market and homeowner’s market for purchasing and selling houses.

There are a number of factors that determine the mortgage rate, one of which is the borrower’s credit rating. Customers must always pick a bank that offers them the lowest mortgage rate as this will result in the lowest monthly repayment and low total mortgage loan cost.

APR

APR is the Annual Percentage Rate or the formula that shows the true cost of a loan from the date of closing to the date of final pay off. The APR will be calculated by taking into consideration a number of factors such as the loan size, closing costs, and the time period for which the loan is obtained. Federal law mandates the APR should be disclosed to the borrower and should be printed on the loan documents. This is because having information on what the loan’s APR is will help consumers make better informed choices. However, it must be kept in mind that APRs may not always be representative of the best loan and a loan with a lower APR does not necessarily mean that the loan is a good deal. This is because the APR calculation makes a number of assumptions that may or may not materialize. These assumptions are that the borrower will hold the loan for its full period, no early payments will be made on the loan principal, and the borrower will sell or refinance their house.

What is the difference between Mortgage Rate and APR?

When applying for a loan, the bank provides the borrower with 2 different types of interest rates; the mortgage rate and APR. Mortgage interest rate is the actual rate at which the borrower will pay interest. The APR is a number that represents the true cost of a loan and is revealed to any customer who applies for a loan (this is mandated by federal law). The APR is supposed to give the borrower more information as to which loan is the cheapest and best choice; however, the problems associated with the calculation of APR may mean that the APR may not always be the best deciding factor.

Summary:

Mortgage Rate vs APR

• Mortgage rates and APR are both information that are provided to a borrower when taking out a mortgage loan.

• Mortgage rates are interest rates that apply to loans that are taken out for the purpose of purchasing homes.

• APR is the Annual Percentage Rate or the formula that shows the true cost of a loan from the date of closing to the date of final pay off.