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How Does a Mortgage APR Work and What Does It Mean?

The Mortgage Brothers Show

How Does a Mortgage APR Work and What Does It Mean?

In this post we explore the difference between APR and Interest rates and how it might affect you as a borrower?

Interest Rate

A home loan’s interest rate is expressed as a percentage of the principal loan amount that a mortgage lender charges you on an annual basis for borrowing your principal loan amount.

This rate doesn’t include fees or closing costs and is only based on the amount you borrow for your home loan.

APR

An APR is a home loan’s Annual Percentage Rate. Much like the interest rate, APR is also displayed as a percentage, but it is typically higher than the accompanying interest rate. This is because an APR not only takes your interest rate into account, but also factors in other costs, such as most closing costs and lender fees. The APR provides a more holistic view of your total mortgage cost on an annual basis.

How closing costs and interest rate affect APR?

As a general rule of thumb, interest rates and APRs have an inverse relationship. A low closing cost or “no-closing-cost” loan with higher interest rate will lead to a lower APR. However, when paying loan closing costs, including paying points for lower interest rates leads to a higher APR.

Are you getting a good deal?

While some lenders may advertise a no-closing-cost loan, it’s important to understand that those costs are still there, but instead of paying them upfront, they’re “absorbed” into the loan.

A common way to do this is by adjusting the opposing levers on interest rates and APR. In other words, in exchange for a higher interest rate, you may be able to lower your upfront closing costs and your total APR. Don’t be fooled. APRs and Interest Rates can be manipulated. Loan estimates and fee worksheets cannot.

So, how do you know if you’re getting a good deal?

To know whether you’re getting a good deal or not, and to determine the lender’s cost of the loan, or in other words your closing costs, focus on the lender’s fees, not the rate. 

We hope this helps give you a good stepping off point to your questions about Interest Rate and APR. If you have any more questions about this, or anything else mortgage related, don’t hesitate to reach out. 

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Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.

Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.

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