Scott Storace - Branch Manager, 100 Pacifica Drive Ste. 140, Irvine CA 92618 NMLS #226339 949.973.0141

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Why is my APR different from my Interest Rate?



Orange County, CA – APR versus interest rate…what’s the difference? It’s a question we have heard often. And no doubt it is one that will be asked many times again. So, this is an attempt to help a few of those people who are wondering which is which and what you need to know. It’s important to be able to tell the difference between the two figures when you’re reviewing mortgage options. It can be confusing at times, so hopefully having a reference point on here will be of great use.

The first thing to remember is that there are two separate rates in a mortgage transaction. There is the annual percentage rate, known as the APR, and there is also the interest rate. Both figures are independent of each other.

Interest Rate

The interest rate, or note rate, is simply the rate of interest that will be charged by a lender on the amount loaned. The interest rate is used to determine the monthly payment over the period of time selected for repayment. The loan will be amortized, or spread out, over the pre-determined period of time. This rate will be calculated by taking the overall amount of interest, and dividing it by the cost of the loan. For example, if a lender was charging a borrower $11,000 a year on a loan of $300,000, the calculated interest rate would be ($11,000/$300,000) x 100% = 3.67%. But why complicate things. When trying to determine your principal and interest payments simply use one of the many loan calculators that are available. Try this one: MORTGAGE CALCULATOR

Annual Percentage Rate – APR

The annual percentage rate, or the APR, is slightly more complicated. There are two major factors to take into account when working out the APR. The APR includes your interest rate, and the cost of the loan.

There are some fees related to a purchase or refinance that are included in the APR and others that are not. Fees that are included in the APR are lending related charges, mortgage insurance, prepaid interest, recording fees and some escrow related charges. Some notable expenses that are not included in the APR are inspections, appraisal, title insurance, transfer taxes and homeowner’s insurance. The Truth In Lending form defines the APR as “the cost of the loan in percentage terms taking into account various loan charges of which interest is only one such charge.” The APR is calculated by spreading these charges over the life of the loan. Naturally, your APR figure will be higher than your interest rate because it is, in essence, your interest rate with a few other charges thrown on top!

As we know though, nothing in life is free. That includes a home loan! No one works for free. There are many people involved in home loan transactions and each has their associated charges. This is one of the many reasons why it’s so important to speak to a mortgage specialist. The fees can be different in purchase and refinance transactions. Who pays for which fees can vary as well. We can take you through these differences and prepare you for what you’ll be expected to pay for closing costs and with your ongoing monthly payment. Understanding your APR, and understanding that it stands alone from your interest rate, means you can look at mortgage products and really understand what you’ll pay in real terms.

Scott Storace

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