I’m starting to pay attention to mortgage loan advertisements now. Most of them include both a Rate and and APR. But what’s the difference?
The mortgage rate is the amount of actual interest charged. It’s usually a round number like 5.75% or 6.0%. So if you have a loan amount of $200,000 and a rate of 5%, you would be charged $10,000 of interest the first year. But the cost of a mortgage involves a lot more than just the rate. There are origination fees, loan discount points, private mortgage insurance, etc.
The mortgage APR, or annual percentage rate, includes both the interest and certain other loan fees. Although it was designed to make it easier to compare different mortgages offered by different lenders, it really doesn’t. First of all, there is no steadfast definition of APR ? each lender can calculate it differently. Some may leave out many fees to make their APR look more appealing, while others include everything. For example, they may assume you have a 20% down payment and won’t pay PMI.
In addition, the APR also has to make some common assumptions that may skew things. It almost always assumes a certain loan amount and that you will be holding the loan for the entire term of 30 years or more. If some of the costs are heavily front-loaded and you only keep the house for 5 years, your actual APR would be very different. The APR for adjustable rate mortgages (ARMs) are based on the future index rates being the same as they are now, which are still near historically lows.
In the end, it seems that both are useful to note, but neither should be used alone to compare mortgage loan offers.