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APR vs. Interest Rate: What’s the Difference?

We hear so much about interest rates when it comes to getting a good rate on a mortgage. However, it’s certainly not the only consideration to be given when making a choice on which lender to work with. The Annual Percentage Rate is another important number to give serious thought to before you sign that mortgage application. So what, exactly, is the deal with APR vs. interest rate?

A Sizable Difference

A mortgage’s APR is the annual cost of the loan to the borrower. This includes applicable fees that may be associated with the mortgage. This number is calculated as a percentage in the same way the interest rate is, but it is more inclusive because it also takes into account the fees associated with obtaining a mortgage, such as closing costs, mortgage insurance, origination fees and discount points. The APR reflects the total cost of the loan instead of just the amount financed. This is a very important characteristic of the APR versus the interest rate.

So why does it all matter? The APR you get on a mortgage is going to be a better indicator of what you’ll pay for the convenience of receiving the loan, or cost of credit. This is a critical reason why mortgage rates are not the be-all-end-all of getting the right loan for your unique needs.

Equal Consideration

When choosing which lender to work with on your mortgage, be sure you give equal consideration to both the interest rate and the APR as well. It should never be just APR vs. interest rate, because both terms should be considered.