Are you aware of the difference between an Interest rate and an APR and why it’s important to know what the APR is when you’re buying a home?
The difference between APR and interest rate is this: the APR (annual percentage rate) is not just the interest rate but rather is a marker that illustrates the total cost for the loan including any fees. An interest rate is just the amount of interest the lender will charge during the term of the loan. The APR is a tool to determine how much the loan will cost. For years, we’ve advised borrowers to shop a home loan around and to ask lenders for the APR so they can make an evaluation between mortgage offers.
The APR will always be higher than the interest rate. Here’s how it works: if you’re offered an interest rate of 2.99%, for example, from two lenders and one has an APR higher than the other lenders, this means there are more closing costs being added to the loan with the higher APR. In other words, the APR will include what the extra costs for the borrower to get that rate.
A lender offering a lower interest rate is not always the best deal for a borrower if it costs thousands of dollars to buy that rate down; those extra costs will show up in the APR. The farther away the APR is from the actual interest rate, the more it will cost to get that rate. Online and out-of-state lenders are famous for offering low interest rates but they try to not disclose the APR and hope the borrower never notices.
Comparing the APR is a great tool for consumers to shop their mortgage around and compare different mortgage lenders. At Indigo Mortgage Colorado, we’re happy to help answer questions about financing for your new home or a refinance. Shop your mortgage and include a local lender like Indigo Mortgage as one of your choices for a mortgage loan.