What Are Interest Rates and Annual Percentage Rates?

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Interest Rates and Annual Percentage Rates?

Home loan officers, mortgage brokers, lenders, and banks discuss two rates when a borrower does research on the mortgage rates.  The two terms are: Interest Rates and Annual Percentage Rates (APR). Often, many people will often use the terms interchangeably. However, they are not the same thing. Not surprisingly, this can be confusing for everyone: consumers, real estate agents, and even CPAs. Ever wonder what the difference is? The Wall Street Journal sums it up nicely in this article. Additionally, we will take time to explain the difference.

First, the interest rate is the amount of money that a borrower will have to pay back on top of the amount borrowed. On the other hand,  the borrower has a more accurate picture of the total cost of the loan with the APR because it includes the fees and charges associated with it.

To illustrate, a borrower taking out a mortgage will find that the interest rate will be the percentage that will be charged on the amount borrowed. Whereas, the borrower will see that the APR includes closing costs, points, and/or other fees associated with the origination and other services associated with the mortgage.

Because of this, the borrower needs to compare both the interest rate and APR when shopping for loans in order to have the complete picture. By comparing both, a borrower will make a more informed decision about the best loan option. We love helping make the home loan process simple for borrowers. So, please connect with us today!


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