What is the difference between the mortgage rate and the APR?
The APR (Annual Percentage Rate) of a loan is supposed to be an overall interest rate with all the applicable closing costs factored in. Unfortunately, not all lenders include the same costs so not all APRs are created equally. Use the APR as a general guide to the overall cost of the loan but keep in mind that you have to look at the details of what’s included to be sure.
The easiest way to think of APR is it the cost of borrowing. The higher the APR is over the mortgage rate the higher the fees you are being charged in the form of rate buy down or origination points.
APR is short for Annual Percentage Rate. There is a lot of confusion out there about APR, mortgage interest rates, effective rate and other rate terms. APR is the calculated rate after taking into consideration the actual interest rate along with various closing costs figured in. For this reason APR will almost always be higher than your note rate on your mortgage. Your note rate on your mortgage will be the actual interest rate that your monthly payment is calculated from. The loan amount, note rate and term of your loan are the three factors that will determine your monthly mortgage payment. Your effective interest rate is the actual rate that you will pay on the loan when it is all said and done. For example if you were to make monthly mortgage payments that were larger than your required monthly payment, then you will have paid down your loan balance a little quicker and you should pay off your loan quicker as well. By paying off your loan ahead of schedule the actual interest rate that you will have paid, your effective rate, will be lower than your note rate because you paid down your balance quicker than you were required to. Making bi-weekly mortgage payments is a prime example of how to pay your loan off much quicker by paying down your loan balance faster, and by doing this your effective rate will be lower than your note rate.
Many lenders calculate an APR differently. The purpose of disclosing an APR to the consumer is to effectively show one the "true cost" of the credit they are obtaining. An easier way is to review with your mortgage professional all of the costs associated with your loan.
Remember that your APR is not the same as your interest rate, and may include any discount points you may have paid to reduce the actual interest rate you will pay.
The mortgage rate or interest rate is the rate that is used to calculate the monthly payment on the loam amount.
Be Careful when considering APR. It is a figure that is easily manipulated.