what is difference between apr and interest rate??

Question

I am shopping for a home loan for $238,000. The fixed rate is 6.875% for 30 years and the Apr is 7.21%. I dont get which one will be charged. We are in the process of finalizing the loan. It was about almost 7k in closing costs. I need to figure out which percentage is really being charged. I dont want to feel like getting ripped off if they are charging me 7.2% Apr when they told me 6.875% interest rate. I dont get the difference

Answer 1

What is the difference between the interest rate and the A.P.R.?
You'll see an interest rate and an Annual Percentage Rate (A.P.R.) for each mortgage loan you see advertised. The easy answer to "why" is that federal law requires the lender to tell you both.

The A.P.R. is a tool for comparing different loans, which will include different interest rates but also different points and other terms. The A.P.R. is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.

While it's designed to make it easier to compare loans, it's sometimes confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.

The A.P.R. on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make -- that's why they're variable rate in the first placed!

So, A.P.R.s are at best inexact. The lesson is, that A.P.R. can be a guide, but you need a mortgage professional to help you find the truly best loan for you.

Note when you're browsing for loan terms that the A.P.R. will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you'll see that A.P.R.s on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time.

Answer 2

Ondre's answer is dead-on. On basically any mortgage, the APR is always higher than the note rate of interest you are paying.

Your payments are calculated at 6.875%. With closing costs amortized over the life of the loan, your APR is higher.

If I were you, I'd be more concerned about the rate and costs than the APR spread. The APR spread is completely normal.

Your rate is about 1% higher than the going 30 year fixed rate today, and $7K in closing costs seems high, unless that also includes setting up your new escrow account. $5-6K would be more in line.

Unless you have credit issues, are taking a no-income verification loan, or will be financing more than 80% of your loan to value without paying PMI (paying mortgage insurance through your higher rate), the rate you are being offered is too high.

Start shopping some more. I'd suggest emailing Ondre, he seems nice, and knowledgable.

Answer 3

APR is a way to compare rates that don't always have the same features. For example if there are other fees, that will usually increase the APR. Since there is such a big difference in the interest rate and APR, it sounds like there may be a lot of other fees. Get them to walk you through everything you are paying and ask questions until it makes sense to you. Don't sign something you don't understand.

Answer 4

APR is what your effective interest rate would be with all of the fees and such associated with the origination & servicing of the loan (points, etc).

The interest rate that you will be billed on is still 6.875%.

Answer 5

I think the apr includes all fees and is the average for the year. Don't worry-you are only charged the correct interest rate. But with all misc fees it comes out to be more.

Answer 6

APR is another way of saying interest rate. If your APR is 7.2%, your interest rate will be 7.2%. The reason for the change could be to recent changes in your credit score. It could have dropped a few points (usually around 5 points) due to the inquiry.