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Explanation Between Interest Rate and Annual Percentage Rate

By Mike in Downtown San Diego Real Estate|Downtown San Diego Real Estate Market Analysis|November 2012 with 0 Comments

Explanation Between Interest Rate and Annual Percentage RateSMany Downtown San Diego Real Estate investors may wonder what the difference is between interest rate and annual percentage rate (APR) when researching or reviewing a potential mortgage. Zillow and the recent article “What is the difference between interest rate and APR (Annual Percentage Rate)?” inform us what the differences are.  The best way to start explaining this question is to start with the definitions.

Interest rate is the starting point and will determine the price that you will ultimately pay monthly for your loan. In other words, the interest rate is what you are charged for borrowing money. It is considered to be a base fee and this fee directly affects your monthly payments.

The APR includes a calculated rate of interest rate and other lender fees. The APR is meant to give a better understanding to the tradeoffs between fees paid at closing and interest rate. The APR is calculated by amortizing the lender fees out over the life of the loan and adding the interest rate to find the correct number.  One thing to remember is that the APR has its limitations. As this fee is calculated over the life of the loan, it is only accurate if you actually keep the mortgage for the full amount of time. Many Downtown San Diego Condo owners only keep the loan for a number of years as they might either refinance or trade up. Therefore, the APR can make some loans look better but in a false way because higher lender fees are spread out over the loan term.

To be on the safe side and to make sure you understand the definitions, always make sure to ask your lender to break down the cost included. You can always ask them to provide you with different scenarios where fees would be paid up front and where they would be financed.  This way, you can make sure that you have taken into consideration the different scenarios and what would work best for you. ')}