dcsimg
We research, you save.

What is the difference between "rate" and "APR"?

HSH.com

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

  • How to avoid a VA foreclosure

    If you're in a VA mortgage and finding it increasingly difficult (or impossible) to make your mortgage payments, you'll need to take action if you want to keep your home from falling into foreclosure.
  • Weekly Mortgage Rates Radar 02/03/2016: Rate Declines Continue

    HSH.com releases its latest Weekly Mortgage Rates Radar showing another decline in mortgage rates during the seven-day period ending February 2, as financial markets continue to react to soft data and the Federal Reserve's apparently more cautious position with regard to raising interest rates. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
  • HSH.com on the latest move by the Federal Reserve

    The Federal Reserve decided today to increase the federal funds rate by one-quarter of a percentage point (0.25 percent).
  • Mortgage Rates Radar 1/26/16: Mortgage Rates Still Falling

    HSH.com releases its latest Weekly Mortgage Rates Radar showing that the month-long decline in mortgage rates continues during the seven-day period ending January 26, as the Federal Reserve again meets to discuss monetary policy and the state of the economy. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
  • HSH's Innovative Thinkers in Housing Economics 2016

    HSH.com's annual list of standout Innovators and Thinkers in real estate and housing economics.