Interest Rates And APRs

Today more than ever it is important to be a wise borrower, because it is important to get the right loan, especially when it comes to your mortgage. When it comes to loans, you often hear the words interest rates and APRs and it is easy to think, I sort of understand what those mean and move on. However, understanding exactly what they mean is imperative to successful and smart borrowing; and, it will enable you to be able to pay back your loans on time. For this reason, make sure you understand the details of interest rates and APRs so you know what you are talking about when you speak to a lender.

It is not uncommon to assume that interest and APRs are the same thing, because both of them relate to fees we incur for borrowing money. However, although they may seem similar, they are actually different and it is important not to confuse the two. Understanding the difference will help you understand whether or not you will be able to pay back the loan or not, and that will be imperative when you decide whether or not to actually borrow from the lender.

Interest is something that most people seem to understand because it is a lot less complicated than APRs. Basically, it is the fee we incur because we decided borrow money, and it is determined based off the amount of principal for the loan and the term of the loan. Although interest is mainly determined off the principle and term, there are other details that could affect your interest rate.

Some specific factors usually affect interest including the type of loan you decide to take out – fixed loans, ARM loans, etc. In addition, your mortgage interest rate also considers the amount of your loan versus the value of your home. Lastly, sometimes, interest is factored based off the type of property you are purchasing. The interest will probably be different if the home is your primary residence, a second home, or an investment property.

One of the great things about a mortgage is that you can actually “buy down” the interest rate if you want to. You “buy down” your interest rate by paying points up front. A point usually equals 1 percent of the loan you are buying, so if your loan was $ 100,000, you could “buy down” five points in interest by paying $ 5000 dollars up front. Buying down is a great way to not only reduce the interest rate, but also reduce the amount you will pay in the long run, and there are actually possible tax benefits from doing so.

If you do not know how to calculate interest, it is actually quite simple. You divide the total amount of interest charged from the loan by the total amount of the loan; therefore, if your lender loans you $ 10,000 and charges you $ 100 in interest your interest rate is (100/10000) x 100 percent = 10 percent. Computing interest rates always simple, even if the numbers are a little bit more complicated.

Moving on from interest rates, APR (short for Annual Percentage Rate) figures the total cost of a mortgage including closing costs and interest over the entire term of the loan. You often hear APR quoted in an annualized for, because APR is a yearly calculation. The nice thing about the APR is that it is a better reflection of the costs to anticipate in the future because it takes into consideration more than just your future interest. It is important not to overlook APR, because if you do, you will overlook important costs that you might not realized are coming in the future.

Since APR considers all costs for the future other than the principle, not just the interest rate, it is usually a higher rate than the interest rate. The calculation for APR is a little more complex than the simple calculation for interest rates and it usually involves an amortization schedule and a more complicated equation. However, because of this APR is a good prediction of future costs.

When you apply for a mortgage for your loan will involve both rates: the interest rate and the APR. Obviously, given the current market conditions and your credit history, you should anticipate the rates to vary. However, if you understand the differences of the two rates, you will be better equipped to choose the right mortgage for your new home.

While interest rates and APRs are definitely based on the market, the controlling costs that come with a new mortgage are definitely something that you have control over. These items are the prepaid items such as the closing costs and mortgage insurance. Work with your lender to negotiate these items, especially given that you have more flexibility with them.

Lastly, now that you are more informed, do not jump the gun and go with the first offer. Shopping around is always wise. Find the lender that best fits you.