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dumb question.. but what is the difference between interest rate and apr?

by leah887 from Scarbro, West Virginia. May 12th 2016 Reply


Lorne Harvey (lorneharvey)
#81 ranked lender in Washington - 418 contributions

Interest Rate is what the balance of the loan accumulates interest at, APR is the yearly cost of the loan after taking into account the pre-paid finance charges. You should be able to google that question and get a more concise definition.

May 12th 2016
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William J Acres (William_Acres)
#2 ranked lender in Arizona - 7,917 contributions

Not a dumb question at all.. but the answer will be so confusing it will make your head spin.. In short.. the government has determined that certain costs associated with obtaining a mortgage should be considered a "Pre paid finance" charge (Underwriting fee, processing fee, escrow fee, etc..).. and so these pre paid finance charges are added to the actual note interest to determine the government calculated APR. The problem with this calculation is that it's different for banks vs. brokers.. You could have the exact same deal, same interest (note) rate, the same fees etc. but the APR will be higher for a broker vs. the bank or mortgage bank. For this reason, It's best that when you are comparing, don't focus on the APR, but rather, the actual fees and note rate.. I hope this makes sense.. if not, feel free to reach out to me and i'll be happy to go into more detail.. I'm a Broker here in Scottsdale AZ and I only lend in Arizona. If you or someone you know is looking for financing options, feel free to contact me or pass along my information. William J. Acres, Lender411's number ONE lender in Arizona. 480-287-5714 WilliamAcres.com NMLS# 226347

May 13th 2016
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Joe Metzler (JoeMetzler)
#1 ranked lender in Minnesota - 3,515 contributions

APR is probably the most confusing thing about getting a home loan, and my advice is to ignore it, as it can completely screw you up. The quick version is that APR takes your interest rate, and factors in closing costs to give you a loan shopping number. In theory, the lender with the lower APR (ie, lower costs) would have a lower APR. This works fine is you are comparing two lenders offering the exact same interest rate. Where it screws everyone up is when the rates are different. For example, maybe one quote is 4.00% with $5000 in closing costs and an APR of 4.122%. The next loan is 4.25%, but closing costs are only $2,000. The APR is higher because the base rate is higher, even though the costs are way lower. Then the third quote is a rate of 3.75%, but closing costs are $8000. Again the APR will be lower because the base rate was only 3.75%. Looking at these three loan quotes, which one is best for you? Looking at APR only, one would say the 3.75% quote. But really?? A much better way to shop is to ignore APR and have a conversation with a professional Loan Officer to determine which of these versions is best for you and your individual situation. All lenders can offer multiple interest rate and closing cost combinations. Just ask. Interestingly enough, because of exact situation, recent changes to mandatory mortgage lender disclosures have significantly de-emphasized APR disclosure from a separate two page form into just one little line on your Loan Estimate (LE). For loans in MN, WI, and SD, visit me at www.St-Paul-Mortgage.com

May 14th 2016
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