If you are buying a house with a mortgage, then accurately knowing the difference between an APR and a standard interest rate could potentially save you thousands, and even tens of thousands, of dollars. However, if you are like the overwhelming majority of new home buyers, then you probably do not know that both are important and costly ways to pay off your mortgage. (read this, for tips on a fast mortgage pay-off)
To kick things off a little bit, let’s take a look at what an APR is, and what an interest rate is.
The interest rate is defined as the percentage of money that you continually pay back over a long (usually long, but sometimes short) period for borrowing a loan. These rates differ, and they can be varied or fixed, but they are always described as a percentage.
An APR rate is a slightly more broad range of what you will be paying for your mortgage. It builds off of the interest rate but takes into account the various broker fees, discount points, other closing costs and charges, and taxes. It gives you a more well-rounded understanding when compared to a traditional interest rate. These are also expressed as a percentage as well.
Here is where it can get a little bit tricky. An interest loan with a rate of 4% will cost you less than one with a 6% rate, assuming that the loan payments are shelled out every month with no other fees, and are both fixed to be the same term.
Together, with the help of both an APR and a general interest rating, the borrower of the loan should be able to figure out what their monthly payments will be. The trick, however, is to understand what interaction these two loan types have with each other.
If a consumer or borrower is in a little bit of a pickle and they want to find the cheapest monthly loan, they should look into a decent interest rate. If they are more focused on what the total cost of the loan will be, say, at the end of the term (however long it may be) then they should focus on the APR as well as the interest rate.
In the short term, you can pay less monthly (or bi-monthly) but also longer, or a higher cost per month but a shorter time. It only comes down to however much money the consumer is getting in per month, or how badly they need it. These are the key factors that dictate what kind of loan someone requests.
If you purchase or rent out a house that you plan to stay in for more than, say, 20 years or so, it is certainly a better option to choose a more stable interest rate that has you paying lower amounts bi-monthly. This helps you to space out the fees instead of paying a lot up front.
However, if you chose to buy or rent a house that you will only be in for ten years or even less, choose an APR (where applicable) that has you paying more per month for a shorter term.
Determining loan methods, especially mortgages for properties and whatnot, can be a very confusing thing; that is why it is so important that you, the buyer, chooses the right lender and examines all of the options.
So, that’s just a quick run-down. Here’s another explanation: