dcsimg
We research, you save.
Got Questions On Rates? (855) 610-2972

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

  • Can I use a USDA-backed loan to purchase a manufactured home?

    A USDA-backed loan may be able to be used, but there are a number of restrictions.
  • HSH.com on the latest move by the Federal Reserve

    The Federal Reserve concluded a meeting today with a quarter-point change in the federal funds rate, but no changes to other monetary policy tools.
  • Home price recovery index: Which metros have improved the most, least?

    Have home prices in your area fully recovered from the declines suffered during the Great Recession, or are they still struggling to make it back to the peak it reached before the crisis?
  • The salary you must earn to buy a home in 27 metros

    Here’s how much salary you would need to earn in order to afford the median-priced home in your metro area.
  • Home buyer programs by state | 2017

    HSH.com has compiled a list of home buyer programs in each state in order to inform borrowers of what assistance might be available to them in their local area.