Save Money By Knowing the Difference Between APR and Interest Rate

Understandably, many first-time homebuyers are confused when it comes to interest rates.

Complicating the issue further, potential borrowers are bombarded with a lot of information, and it can become difficult for them to know when they are getting the best deal. You want to make sure you’re getting all of the correct information when making one of the biggest purchases of your life. By doing so, you ensure you’re making an informed financial decision and not just picking the company quoting you the lowest number.

The best way to do that is to do your homework about the different types of rates you’ll be quoted.

difference between APR and interest rates

A knowledgeable homebuyer knows the difference between APR and interest rate.

Explaining Interest Rates

You may hear an interest rate called the “note rate.”

A note rate is the fee you pay to a lender in exchange for lending you money. Interest rates fluctuate depending on the bond market and can change multiple times a day. You should consult with your VA loan specialist about the timing of locking in your interest rate once you’re under contract. Fixed-rate VA mortgages maintain the same interest rate over the life of the loan.

It’s important to note that obtaining a fixed-rate mortgage doesn’t mean you can never change your rate: You may be able to refinance your home if a lower rate becomes available.

For adjustable-rate mortgages (ARMs) the interest rate can fluctuate. ARMs can usually offer a lower interest rate at the start, but with that lower interest rate comes uncertainty when it’s time for the rate to adjust. For example, on a 5/1 ARM, you have an initial interest rate for the first five years of the loan. Each year thereafter the interest rate can fluctuate depending on the market. If interest rates have gone down you will be in a better position, but if interest rates go up it could cause your payment to rise significantly.

This level of uncertainty and risk deters some homebuyers from pursuing an adjustable-rate mortgage. It’s not a loan product all VA lenders offer.

Explaining Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) is the annual cost of a loan expressed as a percentage. When you receive a Truth In Lending (TIL) statement from your mortgage company the APR will be disclosed. Lenders are required by law to provide you with the APR within certain time frames under the Truth In Lending Act (TILA). The APR takes into consideration the following items:

  • Interest rate
  • Origination fees and costs
  • Closing agent fees
  • Discount points
  • Other fees dependent on the specific transaction

The APR that you are quoted will likely be different from the interest rate because these other fees are also considered. By covering the overall cost of the loan, it becomes easier for the borrower to compare different loan products and mortgage companies. When shopping for a home loan, it is best to compare the APR rather than the interest rate to find which company is offering the most competitive overall deal.

Other Considerations

When comparing quotes from two or more different companies you’ll also want to consider a few other factors:

  • Loan Term: What is the length of the proposed mortgage? By far the most common loan term is 30 years. But you may find that purchasing a home on a 15-year mortgage will save you on both the interest rate and the APR. Review your finances and see if this is a possibility you can consider.
  • Loan Type: Are you looking at a fixed-rate mortgage or an adjustable-rate mortgage?
  • Loan Product: Are you comparing the same loan product?  There are many out there, such as conventional, FHA, USDA and VA home loans. Find out which loan products you are eligible for and then compare.

When doing a side-by-side comparison of different loan terms, types and products you can assess which loan is best suited to meet your needs. Then sit down and compare the interest rate and APR. Only after considering all pertinent factors can you ensure that you are making an educated decision that will best meet your financial needs.

One final thing to note is customer service. While you may find a really good deal with one mortgage company, if they provide poor customer service or don’t know the loan product, it may be best to find someone else who is willing to provide the service you deserve. By finding the proper balance between customer service and a good deal, you can ensure that you have a great loan experience.

You can talk to a Veterans United loan specialist about how to get prequalified at 1-855-524-7279 or fill out this short form and get a call back.

Photo courtesy of nikcname