When borrowing money to secure a property many people are confused of the differences between Interest Rate and APR or Annual Percentage Rate. We tell people when explaining the Truth In Lending statement in their document set that the APR is the reality of what you will pay to borrow the money. A lender isn’t going to just lend without getting something in return so, your Interest Rate and APR are how they will compute what you pay for the line of credit.
They both are considered, displayed as a percentage and but are not the same. When borrowing to purchase or refinance your homesteaded property, your second home or even an investment property, you always have to put into consideration the amount of money you want to borrow and can spend, along with the time frame in which you would need to pay it back.
When looking at your loan options, the Interest Rates is what you want to focus on first. It is the cost of borrowing the principal loan amount. You as the borrower are looking to get the best deal (lowest rate) because most of the time you will need 15-30 years to pay that money back to the bank. The interest rate is what the lender calculates using the current rates, your credit worthiness and debt to income ratio to decide what rate you will receive and what amount of money you can borrow. They will then show you this as a percentage. The higher your credit score usually the better rate you will receive.
The term (length of time to pay back) will depend on how much you would like your monthly payment to be. 15 year loans have a higher payment amount usually when compared to a 30 year loan because the timeframe to pay back is shorter. What gets people confused is that the bank usually focuses on the Interest Rate when telling the borrower what loan program they qualify for. When borrowers then see APR or Annual Percentage Rate they don’t understand what the difference is and how they are considered when borrowing money.
The APR or Annual Percentage Rate includes your interest rate and any other fees you will be paying when borrowing the money. It is the true cost of the loan.
For instance, some people can buy down their Interest Rate but, in doing so incur something called discount points. These and other fees such as lender/broker fees, prepaid interest and closing costs are considered when calculating the APR. The APR percentage is usually higher than the Interest Rate percentage because it includes all of these fees. If there were no closing costs, lender/broker fees, prepaid interest fees or discount points the two percentages would be the same.
As a consumer it is your right to shop around… but, in doing so, educate yourself on the differences in the main key components so that you can make the best decision for your financial circumstance. Contact our loan experts to day to get the complete picture of what you will pay and when.