The Difference Between Interest Rate and APR in Mortgages

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Understanding Interest Rates and APRs

When considering a mortgage, it’s crucial to understand the difference between interest rates and annual percentage rates (APRs). At O1ne Mortgage, we aim to provide clarity on these terms to help you make informed decisions. For any mortgage service needs, feel free to call us at 213-732-3074.

What Is an Interest Rate?

An interest rate, expressed as a percentage, represents the annual cost of borrowing money in terms of interest only. Lenders use this rate along with the loan balance to determine daily interest accrual and monthly payments. This rate does not include other borrowing costs, such as upfront or ongoing fees.

Interest rates can be fixed or adjustable. A fixed-rate loan maintains the same interest rate throughout the loan’s life. In contrast, an adjustable-rate mortgage (ARM) has a fixed rate for an initial period (usually between three and ten years) before it becomes variable, fluctuating based on market conditions.

What Is an APR?

The annual percentage rate (APR) of a mortgage includes not only the interest costs but also all charges and fees associated with the loan. This comprehensive rate provides a true cost of borrowing, encompassing closing costs, broker fees, points, and other charges incurred during the loan process.

APR vs. Interest Rate

While the terms interest rate and APR are often used interchangeably, they are distinct. The interest rate only includes the cost of interest, whereas the APR includes all borrowing costs. Here’s a quick comparison:

• Interest Rate: Includes only the cost of interest, used to calculate interest charges on the loan, represented as an annualized percentage, must be disclosed in your loan estimate.
• APR: Includes the cost of interest, broker fees, closing costs, discount points, and other charges, not used to calculate interest charges on the loan, represented as an annualized percentage, must be disclosed in your loan estimate.

Why Is My APR Higher Than My Mortgage Rate?

The APR on a mortgage loan is typically higher than the loan’s interest rate because it represents the total cost of borrowing. While mortgage rates are often highlighted in advertisements, comparing loan offers based on their APRs provides a more accurate view of the overall cost.

If there are no additional costs beyond interest, the APR and interest rate will be the same, but this scenario is rare for mortgage loans.

Build Credit to Reduce Your APR

Shopping around is an excellent way to ensure you get the best APR on a home loan. However, before starting the comparison process, it’s essential to build your credit history. A higher credit score increases your chances of securing a low interest rate, resulting in a lower APR.

Check your credit score to gauge your current credit health and review your credit report for areas of improvement. This may include paying down credit card balances, paying off small-balance loans, and staying current on payments.

Getting your credit ready for a mortgage loan can take time, but qualifying for even a slightly lower interest rate could save you tens of thousands of dollars over the life of the loan.

For personalized mortgage services and expert advice, contact O1ne Mortgage at 213-732-3074. We’re here to help you navigate the complexities of mortgage loans and secure the best possible terms for your financial future.

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