What you pay to borrow money goes beyond your interest rate. By knowing what APR on a mortgage means, you can get a better understanding of the total cost of your mortgage.
Knowing the APR is also a great way to compare lenders. It includes all costs associated with your mortgage spread out over the life of the loan. However, you’ll need to know how it works and how your APR affects your loan.
What Is APR?
The annual percentage rate, or APR, is the true annual cost of borrowing from a lender to finance the purchase of your home. Your APR is your interest rate plus other fees, points, and charges that you pay spread out over the life of the loan. Because of this, your APR is typically higher than your interest rate.
By law, lenders are required to disclose the APR they charge borrowers. According to the Consumer Finance Protection Bureau, you can find your APR in your Loan Estimate. Your interest rate is listed on page 1 under “Loan Terms,” and the APR on page 3 under “Comparisons.”
How Does APR Work?
Knowing what the APR is on a mortgage and how it impacts your loan is an important part of mortgage shopping. When comparing offers, it’s better to use the APR in order to understand the true cost of the loan.
Your APR can include:
- Origination fees
- Mortgage broker fees
- Closing costs
- Mortgage insurance
Your home loan’s APR is calculated by determining what the loan will cost you each year and is displayed as a percentage. It’s important to remember that this percentage is separate from your interest rate.
To calculate your APR, add all fees to your loan amount and determine what the monthly payment would be if all fees were included in the loan. That payment can then be converted into an interest rate.
Here’s an example:
You take out a $300,000 mortgage with a 6.0% interest rate and you pay $7,000 in upfront fees. Your monthly principal and interest payment is about $1,798. If you add all fees and convert that into an annual rate, the APR would be 6.22%.
Total Mortgage has branches across the country. Find a Total Mortgage branch near you and speak to one of our friendly mortgage advisors to explore your borrowing options.
What Is the Difference Between Interest Rate and APR?
Your interest rate is a percentage of the principal balance on your home loan that you pay your lender for borrowing the money. The interest rate you pay is based on overall economic conditions as well as personal factors, such as your credit score, the size of the loan, the price of the home, the loan type, and more.
APR includes the interest rate plus other fees connected to your home loan. APR is the overall cost of borrowing, not just your interest rate.
A common question is whether it’s better to have a lower interest rate or lower APR. However, the answer depends on what’s more important to you: a lower monthly mortgage payment or the lowest total loan cost.
If you plan to stay in your home for many years, a lower interest rate may be the better option. If you’re planning to sell soon, a lower APR could save you more money.
Types of APR
APR doesn’t only apply to mortgages, and there are several types of APRs. Here are some common types of APR:
- Purchase APR: Purchase APRs apply to credit cards. This is the interest rate applied to credit card charges that aren’t paid off during that billing cycle.
- Cash Advance APR: This is the cost to borrow cash from your credit card. Cash advances on credit cards usually have a higher interest rate than purchases.
- Penalty APR: If you violate any terms of a credit card contract, your card issuer can temporarily increase your APR.
- Introductory or promotional APR: Credit cards may come with a lower APR for a certain amount of time.
- Fixed-rate APR: The APR remains constant and doesn’t change over time.
- Adjustable-rate APR: With an ARM, the interest rate can fluctuate over time. APR estimates on an ARM can potentially underestimate the true cost of borrowing if mortgage rates rise.
What Is a Good APR for a Home Loan?
What is regarded as “a good APR” depends on many factors. The APR available to you will not only depend on the U.S. Prime Rate, but also on your own personal circumstances and the lender that you choose.
As previously mentioned, your interest rate is determined by economic factors as well as personal factors. Most fees associated with your home loan are set by the lender. Also, the U.S. Prime Rate always changes, so what may be a good APR one day can change the next.
When it comes to mortgages, the best APRs are usually available on 15-year mortgages and ARMs.
Because lenders are exposed to less risk on a 15-year mortgage compared to a 30-year mortgage, they’re able to offer a lower interest rate. It also costs less in the long run since there are fewer interest payments than on a 30-year mortgage.
The initial interest rate on an ARM is typically below the market rate when compared to a similar fixed-rate loan. However, the APR can go up once the rate rises.
Find Affordable Rates With Total Mortgage
By answering “What is the APR on a mortgage?” you can get a better understanding of the true cost of your home loan. But a low APR doesn’t always mean you’re getting the best deal.
Getting the best deal on your mortgage means taking the time to crunch some numbers by comparing lenders, rates, and fees associated with your home loan.
If you’re mortgage shopping, be sure to check out Total Mortgage’s loan program options. If you have questions or need more information, schedule a meeting with one of our mortgage experts.
Apply online today and get a free rate quote.