August 23, 2021

APR vs. Interest Rates



If you are refinancing or taking out a mortgage, there are so many things you will want to take into account. Specifically what an interest rate or APR will mean for you. It’s important to note that an interest rate is not the same thing as your loan’s annual percentage rate (APR), though both relate to the cost of borrowing money. 

When searching for the right mortgage, the APR and interest rate are two of the most crucial numbers to consider, because even the smallest difference in rates can have a significant impact on your overall costs. Knowing your options and what both numbers mean are equally important when deciding how much home you can afford. Wondering how both of these affect you? We’re here to help!

Interest Rate 

Simply put, an interest rate refers to the percentage of the annual cost of a loan to the borrower without fees. Banks will either charge a fixed rate that remains the same for the entirety of the loan or a variable that changes as prevailing rates change. 

There are a number of other things that can also affect your rate. Along with market trends, your credit score and financial standing also influence how much interest you will pay. If possible, we suggest getting a loan when rates are low, but borrowers who are unable to wait may just have to pay more. 

APR

The annual percentage rate is the annual cost of a loan to a borrower including added costs. Similar to an interest rate, the APR is calculated as a percentage. However, it includes fees such as mortgage insurance, closing costs, discount points, and origination fees. What this means is that an APR is almost always higher than an interest rate and can get tricky since the costs included vary depending on the lender. 

Comparing Interest Rates and APR

When you’re searching for the best deal on your mortgage loan, there are some differences to be aware of. The APR is intended to give you more information about all you’re really paying for. Oftentimes, borrowers believe that a loan with the lowest interest rate is the best choice, only to find out the additional fees outweigh the savings in interest. 

You can use an APR as a general basis for comparing costs of loans because lenders follow the same rules to ensure the validity of an APR. When you compare one loan’s APR against another you get a more accurate comparison of the total cost — and of course, be sure to compare actual interest rates as well. 

How This Affects You 

Still unsure what this means for you? Hopefully, by understanding the difference between the two, you are able to make a well-informed decision when the time comes for you to take out a mortgage! You have options ahead of you that can help you save money in the long run and choose which one is the best fit for you. 

As always, our team here at Method Mortgage is also here to help you and be your friendly guide. Give us a call today! 

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