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Ask the Home Specialist: What is Annual Percentage Rate?

You’ve got questions… we’ve got answers! Each week our Home Specialist will answer your mortgage questions.

Question: We’ve found our dream house, and now my husband and I are looking into mortgages, but we’re confused about some of the terms associated with the costs. Obviously, there’s the principal balance and interest, but what is the APR and how will that affect our monthly payments?

Answer: Great mortgage question! Thanks for asking the Home Specialist.

You’re right that there are a lot of terms associated with your mortgage payment. You’ve already mentioned principal and interest:

  • Principal - a sum of money lent or invested on which interest is paid.
  • Interest - money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.

But as you mentioned, there’s another term associated with your mortgage payment—APR.

APR stands for Annual Percentage Rate and is described as the interest rate and costs for a whole year, rather than just a monthly fee or rate. Basically, your APR gives you a more complete picture of how much your mortgage loan is costing you.

The biggest difference between APR and your interest rate is the period of time. Interest rate is the current cost of borrowing for that pay period expressed as a percentage and doesn’t include any fees or other charges related to financing the mortgage loan. APR, however, is looking at the cost of borrowing for the whole year and taking into account more factors, such as compounding interest, mortgage points, mortgage brokers fees, and other charges or costs associated with your loan. Typically, your APR is higher than your interest rate.

In general, though, the lower your APR, the better! However, as with most things related to mortgages, there are other factors to take into consideration. For instance, in some cases, in order to get a lower APR you may be required to pay mortgage points or other fees. If that’s the case, you might want to look at whether or not that money is better used to get a lower APR or to use as down payment to lower your monthly mortgage payment.

Your APR is affected by a number of factors, including:

  • Credit score
  • Debt-to-income ratio
  • Timeframe
  • Points
  • Closing costs

As you can see, Ashley, APR doesn’t necessarily affect your monthly mortgage payments, but instead gives you a more complete picture of how much your loan will cost over the year. Best of luck finding a mortgage (and did we mention we can help?)

 

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