Rate vs. APR

Rate vs. APR:

Understanding Mortgage Interest Charges

 Knowing the difference allows borrowers to accurately compare the true cost of different mortgage offers. While the interest rate shows the cost of borrowing the principal alone, the APR includes additional fees, giving a fuller picture. Understanding both metrics helps borrowers assess the total cost of their mortgage, including fees that might not be obvious at first glance. This ensures they are not surprised by hidden costs later.

Interest Rate:

• Definition: The interest rate is the annual percentage charged by a lender on the principal amount (the initial amount borrowed).
• Purpose: It represents the cost of borrowing the principal amount alone.

Annual Percentage Rate (APR):

• Definition: The APR includes the interest rate plus additional fees and charges, such as origination fees, points, and broker fees.
• Purpose: It provides a broader measure of the total cost of borrowing, expressed as an annual rate.

Key Differences:

• Interest Rate: Covers only the cost of borrowing the principal.
• APR: Includes the interest rate and additional fees and charges.

Purpose:

• Interest Rate: Helps understand the cost of interest alone.
• APR: Offers a comprehensive view of the total borrowing cost.

Legal Requirements:

• Lenders must disclose both the interest rate and APR.
• The APR is crucial for consumers to compare the true cost of loans from different lenders.

While the interest rate indicates the annual cost of borrowing the principal amount, the APR provides a more comprehensive view by including additional fees and charges. This helps borrowers make more informed decisions about their mortgage options.