There are many costs associated with taking out a mortgage. These include:
- The interest rate
- Other charges
The interest rate is the cost you will pay to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.
An annual percentage rate (APR) is a broader measure of the cost to you of borrowing money, also expressed as a percentage rate. In general, the APR reflects not only the interest rate but also any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Why have both?
“The biggest difference between the two is that the interest rate calculates what your actual monthly payment will be,” says Kathleen Beck, Mortgage Lender, “while the APR calculates the total cost of the loan. A homebuyer can use one or both to make comparisons when shopping for loans.”
As an example, a loan with a 4.25% rate will have a lower monthly payment than a loan for 6.5%, assuming both loans are fixed for the same term. Which means the total cost of the 4.25% APR will be less than the loan with the 6.5% APR.
How long you will stay in your home matters
If you plan on staying in your home for the entire 30 year mortgage, it makes sense to go with the lowest APR because you will end up paying the lowest amount for your house. But if you know you are not going to be living in that house that long, it could make sense to pay fewer upfront fees and get a higher rate and a higher APR because the total cost will be less over the first few years.
“Because the APR spreads the fees out over the course of the entire loan, you get the most value only if you stay in the home throughout the entire mortgage.” Kathleen says.
The Right Lender is Crucial
Kathleen says “If you are planning on staying in your home for a shorter period of time you need to do the math and figure out your break-even point. A good lender will help you do that, I will help you do that!” You need to know if you are going to lose money by paying for a lower APR, but end up moving sooner than your break-even point!