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What is the difference between interest rate and APR?

By January 8, 2013 March 14th, 2020 No Comments

Without getting too technical here, both are extremely important.  Interest Rate is the rate with which you repay the mortgage and APR, or Annual Percentage Rate, is the cost of credit, or namely, the interest rate plus fees associated with obtaining that rate annualized. This is why you typically always see the APR higher than the interest rate. Many companies will greatly discount the rate, at your cost, and roll it into your mortgage.  The outcome is you get a great rate and pay through the nose for it at the same time.  This is why it is always important to review the APR in any rate quote to ensure you aren’t paying hidden fees that make that great rate not so great anymore.

For Example (assuming 30-year term with a $300,000 loan amount)

  • Company A offers an interest rate of 3.5% (3.776% APR) with 2 points ($6,000) to obtain the rate. The principle and interest payment is XXXX
  • Company B offers an interest rate of 3.75% (3.75% APR) with no points ($0) to obtain the rate. The principle and interest payment is XXXX

Company A’s interest rate and payment are reduced from Company B’s but the costs required to obtain that reduced rate and payment might be exhibitive based on your goals.  To make an educated decision, consider the Break-Even Analysis

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