Are you entering the housing market for the first time? If so, it can feel a little overwhelming at times. There are many intricacies for you to learn. For example, do you know the difference between your APR vs. Interest rate? They are similar. However, there are key differences.
Interest Rate vs. APR
Your interest rate and APR both refer to specific costs associated with financing. Modern lending institutions must release a disclosure indicating each of these values. When you apply for a mortgage, compare the differences using both of these values.
Annual Percentage Rate
Your annual percentage rate includes all the fees associated with your mortgage. It should be larger than your interest rate. Use it to calculate how much the financing will cost you.
Includes Interest Rates:
Your interest rate makes the base rate for your APR. Any other fees are then added to your total. This total is divided by the term length to determine your final APR.
Additional Fees:
Depending on your mortgage, many other fees could be included in your APR. The most common would be private mortgage insurance. This is insurance to protect the lender. Typically, you only need to get PMI when your down payment is below a certain size. As long as you can put 20% down or more, you should not have to worry about it.
Interest Rates
The interest rate on your mortgage applies to the principal balance. Most mortgages compound either daily or monthly. The principal is multiplied by the interest rate to get your interest charge. When you make your monthly payment, it applies to the interest balance first. Once the interest is paid for, the remaining balance pays down your principal. As the principal balance decreases, you will pay less overall interest each month.
Fixed Rate:
Most mortgages are made using a fixed interest rate. These offer more security compared to a variable rate. If your interest rate is fixed, you never have to worry about your monthly payment changing.
Variable Rate:
Variable interest rates offer homeowners a unique way to finance their home purchase. Most of the time, they feature lower rates for the first portion of the loan. Typically, the interest rate begins to float after your entry rate expires. This could lead to your payment ballooning substantially.
Term Length:
The term length of your loan impacts the total amount you pay in interest dramatically. The longer the loan, the more you end up paying. If you would like to minimize the amount of interest you pay, a short term length is better. For example, a 15 year mortgage will have less interest than a 30 year mortgage with the same interest rate.
Top Factors That Impact Your APR and Interest Rate
How do you get the most affordable mortgage? It all comes down to your creditworthiness. If an institution sees that you are reliable, they will lend to you on favorable terms. Improving your credit score could make purchasing a home much more affordable. The following factors will help determine how expensive your mortgage is.
Credit Score:
Your credit score is a single number that encapsulates your creditworthiness. The most important factors are straightforward. Always pay your bills on time. Do not make too many credit inquiries. Keep your accounts open for a long time. Finally, have a diverse mixture of credit accounts. If you do all of that, your credit score will be superb.
Type of Mortgage:
There are plenty of options for mortgages. The type of mortgage you get will impact what your interest rates are. If you can get a federally insured mortgage, you could get a much better interest rate. These are available through the FHA. Veterans can even get approved for one of these without any money down.
Private Mortgage Insurance:
Private mortgage insurance dramatically increases the APR of your mortgage. When a borrower is unable to provide a sufficient down payment, the lending institution will require insurance. PMI ensures that the lender does not lose money if you are unable to make your payments on time. Once you pay off 20% of the home’s mortgage, you can remove the PMI.
Down Payment:
How much money can you put down on the property? The more money you can put in your down payment, the lower your interest rate will be. A large down payment is an indication to the lender that you are responsible financially. It takes discipline to save up the money for a large down payment. They will notice it.
The Bottom Line When It Comes to APR Vs. Interest Rates
Anyone interested in real estate needs to understand these terms. Every mortgage you get will have them. Interest rates are a simple percentage that are applied to the principal of your mortgage balance. APR includes the interest rate as well as any additional fees for the mortgage. Ultimately, the APR determines how much the financing will cost you.
