The Difference Between Interest Rates And APRs

If you are new to buying a house, borrowing or have made some mistakes when in the financial market, you might consider learning the lending terms. You hear the words interest rates and APRs and usually your first instinct is to nod you head and think, “whatever”, because ultimately you need the money. However, interest rates and APRs have a major impact on the loans we take out and can also affect our ability to pay back our obligations. Therefore, if you are considering working with a creditor, read up about the details of interest rates and APRs so you can be an educated borrower.

For many people, we assume that interest rates and APRs are the same thing, because both of them charge us money. Yet, on the contrary, interest rates and APRs are quite different and they will definitely impact the loan you take out and even your ability to pay it back. For this reason, it is imperative to understand the difference between to two so you know what you are getting yourself into.

It is easier for most people to understand interest because interest is more straightforward and simple. For example, when it comes to your mortgage, usually your interest is determined by the principle and the term of the loan. However, many nave people assume this is the only factor affecting interest and the overlook other important factors that can affect interest rates.

One of the biggest factors that affect the interest rate is the type of loan you take out with the bank – fixed loan, ARM loan, etc. In addition, your interest rate can also vary depending on the amount of your loan versus the value of your home. Also, many times interest is evaluated based off the type of property you decide to purchase. Depending on whether you are purchasing a home for a primary residence, secondary residence, or investment property, the interest rate can vary.

One of the greatest things about a mortgage is the opportunity to buy down your interest rate by paying more up front. When you buy down you receive a point for 1 percent of your total principle that you pay up front. For example, you could buy down 5 points in interest if you paid $ 5,000 up front for a $ 100,000. Buying down interest rates are not only a great way to lower the interest rates, but they also save you money and can possibly allow for tax benefits.

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.

APR is short for Annual Percentage Rate, and it calculates the total cost of a mortgage including closing costs and interest over its entire term. The APR is reflected as a yearly rate. While it includes interest in its calculations, it is an effective way to compare mortgages because it tends to best reflect the true cost of the loan. If you overlook the APR, you might overlook some of the cost that you need to anticipate in the future.

The calculation for APR is not as easy as interest rates because it involves so many factors, however this is why it is often a better indicator for the future. It usually involves amortization schedules and complex equations, therefore you can count on an accurate rate.

When you apply for your mortgage loan both rates, the interest rate and the APR are involved. The actual rate will depend on the market conditions at the given time and your credit history. Regardless of the changing rates, understanding the two terms will help you to more effectively choose the right mortgage.

Although interest rates and APRs are definitely based on the conditions of the market and you might not be able to control them, you do have some control over the controlling costs of your mortgage. These costs are associated with the initial purchase of your home and include items such as closing costs and mortgage insurance. Make sure to negotiate the price of these items with your lender.

Also, because you are more informed about lending, you should shop around. You might be tempted to go with the first person that offers you a loan, however it might not be the best decision. Research and find the best choice for you.