When you’re refinancing or taking out a mortgage, keep in mind that an advertised interest rate isn’t the same as your loan’s annual percentage rate (APR). What’s the difference?
- Interest rate refers to the annual cost of a loan to a borrower and is expressed as a percentage
- APR is the annual cost of a loan to a borrower — including fees. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees such as mortgage insurance, most closing costs, discount points and loan origination fees.
Why the difference? The APR is intended to give you more information about what you’re really paying. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing certain costs of loans. (Remember, though: Your monthly payment is not based on APR, it’s based on the interest rate on your promissory note.)
So evaluate carefully when you look at the rates lenders offer you. Compare one loan’s APR against another loan’s APR to get a fair comparison of total cost — and be sure to compare actual interest rates, too.