Buying a home is an exciting milestone, but evaluating options for financing that home can feel daunting.
When considering financing options, don't focus on a loan's interest rate alone to estimate its affordability. Understand a loan's annual percentage rate, or APR, for a more accurate picture of the total cost, which can potentially save you money over the loan's duration.
Interest Rate and APR: What's the Difference?
While both interest rate and APR are used to describe the loans costs, its important to distinguish between the two rates and what is included in each.
- Interest rate measures the amount of interest paid to the lender on the loan's outstanding principal each year. Your interest rate will be used to calculate the monthly payment but doesn't include extra mortgage-related costs.
- APR measures a loan's overall cost and factors in the interest rate as well as additional mortgage finance charges and other related costs.
Why You Should Consider APR
When it comes to evaluating loans and determining what you'll pay, interest rate alone doesn't tell the whole story since it excludes factors such as mortgage insurance, closing costs and origination fees, which also contribute to a loan's entire cost. Looking at the APR, which evaluates the loan's total cost, is an accurate way to assess the total loan costs associated with fixed-rate mortgages based on the same amount of principal. For example:
|
|
Loan A |
Loan B |
|
Term |
30 years |
30 years |
|
Loan Amount |
$250,000 |
$250,000 |
|
Fixed Interest Rate |
4.5 percent |
4.6 percent |
|
Closing Costs |
$5,800 |
$2,600 |
|
APR |
4.697 percent |
4.689 percent |
|
What You'll Pay Over the Term |
$456,018 |
$461,380 |
Because it accounts for multiple expenses beyond a loan's principal and interest, the APR percentage is usually higher than the loan's interest rate. But it gives a more accurate look at your total cost over the term of the mortgage.
Comparing adjustable-rate loans is trickier because the interest rate fluctuates. Use Regions' mortgage calculator to help level the field when comparing adjustable-rate options.
Consider All Loan Factors
Look beyond the principal and interest repayment of your loan, and factor in the additional costs that are calculated by the APR. Understanding the differences between interest rate and APR can help you determine which loan option is best for you.
Before you put a bid in, you’ll also want to factor in these considerations when buying a home.
