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Dumb question... what is the difference between the APR and APY?

by yesenia637 from Mescalero, New Mexico. Sep 16th 2016 Reply


Mario Jackson (mjmillennium)
#58 ranked lender in Ohio - 8 contributions

the APR is the Annual Percentage Rate. When you go in and they say that your rate is 5%, that is the rate you are paying on the money. The APY is the actual "yield" or amount that is made on the loan. For example; if you have a 5% rate and are charged 2 points on a loan of 100,000, you are actually paying the 5% PLUS the 2 points which means the funding source is earning more than 5%.

Sep 16th 2016
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Charlie Sparks (CharlieSparks)
#9 ranked lender in New Mexico - 397 contributions

IMO, all part of our politicians and regulators efforts to protect consumers, but with the unintended consequence of adding layers of confusion on to an already overwhelming amount of information. To really answer your question, this link can explain it better than I can: https://www.lender411.com/mortgage-advice/question/13210/ (you may have to copy/paste)

Sep 16th 2016
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Larry Gray (lgray_312_247)
#595 ranked lender in California - 1,139 contributions

The APR is a hypothetical rate for which calculations had largely been determined from lender to lender since the FEDs had required it's disclosure regardless of the actual rate on the loan. There are some basic rules in determining APR and it seems lenders might all be closer to making calculations in the same way. If you see the rate is 3.5% and the APR is 4.0%, then the APR indicates you are likely paying a lot in fees to the lender, escrow and title companies for the loan. If the rate is 3.5% and the APR is anywhere from 3.5% to 3.7% then it would seem the costs contained in the loan fall under what would be considered reasonable costs. It would be a good deal to get 3.25% in rate with an APR of 3.45% versus 3.75% with 3.76% APR if you recoup the difference in cost in a reasonable amount of time. After all, thereafter a savings of $150 or $200 a month, etc would be great.One exception to it being ok to have a far higher APR than the actual rate you receive would be on an FHA loan. It is much higher primarily because the 1.75% of the loan amount added into the loan for the mortgage insurance premium allows you not to have to come in with the money, but the cost is added to the other costs of the loan. "Annual Percentage Yield (APY) is the rate of return of an interest rate, considering compound interest. Compound interest is interest earned on top of previous principal and interest. APY is associated with savings. It takes the interest rate and considers how often the interest is compounded over the year, to give you a percentage."

Sep 16th 2016
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Charlie Sparks (CharlieSparks)
#9 ranked lender in New Mexico - 397 contributions

Sorry, wrong link! http://www.realtor.com/advice/apr-apy-difference/?is_wp_site=1

Sep 16th 2016
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Larry Gray (lgray_312_247)
#595 ranked lender in California - 1,139 contributions

In describing an FHA loan having to include the 1.75% of the loan amount for the mortgage insurance premium along with other loan costs to determine the APR versus the actual rate on the loan...I meant to say it should be the one exception to an APR that is .5% or more than the actual rate "not being ok, generally." It can be a shock to see how much higher the APR is compared to the actual rate you receive, on an FHA loan. That is ok because you are able to avoid having to bring in 1.75% of the loan amount in additional funds for your home purchase.The whole point of APR is that the FEDs wanted consumers to have a way to compare costs from lender to lender if they were viewed as hypothetical rate. Thus, all things equal, you should be able to decide between lender A's 3.25% rate with a 3.64% APR and lender B's 3.5% rate with a 3.69% rate.

Sep 16th 2016
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