If you’ve been checking interest rates online, you may see loan programs offering 3.7% interest for 30-year fixed rate mortgages, or 3.55% for a 15-year mortgage. But looking again, the same loan also says 3.82% APR. What does that mean? What is APR, anyway?
APR Means "Annual Percentage Rate"
Sometimes the interest rate quoted by lenders will be the same as the APR (Annual Percentage Rate). But APR can also be quoted at a higher percentage than the loan’s basic interest rate. The basic interest rate a lender indicates includes only interest charged on the actual mortgage amount. APR reflects the interest charged when lender fees are included.
Why is it important to know the difference between interest rate and APR?
Let’s say Lender A. is offering a $380,000 30-year fixed rate mortgage for 3.8% interest. But the APR is 4.1%.
Another lender is offering a $380,000 30-year fixed rate mortgage for 3.9% interest. But this lender has fewer additional costs and fees and their APR is 4.0%. Which loan would be the better deal?
The APR isn’t the only criteria for selecting one mortgage lender over another, but it can be an important one because it is tied directly to your monthly mortgage payment. The lower the APR, the lower your monthly payment will be.
You can calculate APR for a loan on your own by using a simple formula: the total cost of fees and interest divided by the principal (amount of the loan), divided by the number of days in a year (365). Then, multiply that number by 100 and you will have the APR.
Most lenders automatically do this calculation for you, but you can find advertisements with a simple interest rate being featured in bold numbers, while the APR is in smaller, less visible numbers. No matter what lender you’re considering, you should always check both the simple interest rate and the Annual Percentage Rate (APR). Thanks to a federal law, the Truth in Lending Act, lenders must provide you with a statement disclosing all the charges related to your loan, and how much it will cost to repay the loan in full before the end of its term.
Knowing the APR for the mortgage you’re considering is important, but just a reminder. The APR for a 15-year fixed rate mortgage isn’t comparable to one for a 30-year home loan or an adjustable rate mortgage (ARM). Working with a home loan professional, you can compare APRs and other loan terms to choose the best mortgage for your needs.