What is the difference between "rate" and "APR"?
Q: What is the difference between "rate" and "APR"?
A: APR (Annual Percentage Rate) is perhaps the most misunderstood part of mortgage finance. "Rate", or more properly "contract interest rate" is the actual rate of interest you are being charged. If it costs you nothing to get your loan -- that is, there are absolutely no costs whatsoever -- your interest rate and APR would be identical. However, mortgage loans do have fees, and paying them means that your actual cost of credit is higher.
Here's why: If you want to borrow $100,000 at 4%, your contract will say 4%, and your monthly payment on a 30-year term will be $477.41 per month. If there are no costs at all to obtain the loan, your APR will be 4.00%
However, if it cost you $2,000 to get the loan, you didn't actual net $100,000 from the mortgage lender, but rather $98,000 instead. Your monthly payment, by contract, is still $477.41 - and making a $477.41 per month payment on a $98,000 loan translates into an interest rate of 4.16%, which is your actual cost of the loan -- and your APR.
Please know this is a simplified example. What does or does not get included in the calculation of APR is affected by lender refund policies and more. As such, it's possible for two seemingly identical loans to have different APRs!
The calculation is far more complicated for ARMs, and doesn't properly account for today's products where the initial interest rate is higher than even the calculation of the sum of index + margin, which governs the interest rates for future loan changes.
More help from HSH.com
Metropolitan area definitionsMetro area definitions for the 50 metropolitan areas in "The salary you must earn to buy a home in 50 metros"
The salary you must earn to buy a home in the 50 largest metrosHere’s how much salary you would need to earn in order to afford the median-priced home in your metro area.
Will the debt forgiven from my loan modification be treated as income and taxed?Mortgage debt forgiven via due to principal reductions in HAMP and other mortgage modifications aren't subject to tax, but there are conditions you should know.
HSH.com on the latest move by the Federal ReserveThe Federal Reserve concluded a meeting today with no change to the federal funds rate; the target range for the key policy tool remains 1.25 to 1.5 percent.
How to refinance when you are self-employedRefinancing rules aren't the same when you are self-employed. This article explains how self-employed borrowers can successfully refinance.