What is an APR?
The annual percentage rate, or APR, is how much you’ll pay in interest and other fees when you get a mortgage to buy a home. APR can also be considered the total cost for a debt over a one-year period. Your annual percentage rate includes all of the major fees associated with the loan like closing costs, points, and private mortgage insurance.
The APR is also your “apples to apples” number when comparing loans from various lenders. If one lender has a much higher APR for the same interest rate, that means they are charging you more to get the loan.
There are some costs that aren’t calculated into APR, including the home appraisal, title search, title insurance, credit report, and transfer taxes.
Interest rate vs. APR
So, which is more important, the interest rate or APR? Well, it’s important to look at both. If you only consider the interest rate, you may not know about all the fees associated with your loan. But, if you focus only on the APR, you could miss out on a lower interest rate.
Keep in mind that the fees that are included in the APR are paid at closing. In contrast, your interest rate is what you’ll pay over the life of your loan, which may last as long as 30 years.
How to decide?
If you have the cash upfront and would rather have a lower monthly mortgage payment, it might be worth it to you to shop for the lowest interest rate, even if the APR is slightly higher.
On the other hand, if you need all your cash on hand for the down payment, you might need to pay a slightly higher interest rate with fewer fees at closing.
You should also consider how long you plan to live in the home. If your break-even point (where the extra fees you paid upfront are balanced out by a lower interest rate) for a higher-APR/lower-interest-rate loan is seven years, but you plan to sell the house in five, you’re better off to get a higher-interest-rate/lower-fee loan.
Ultimately, you’ll want to look at the interest rate, APR, and the details about what fees have been included (or not included) in those numbers.
Have questions? Let us know!