APR v. Interest Rate - The Difference Explained

 

The term annual percentage rate of charge (APR), corresponding sometimes to a nominal APR and sometimes to an effective APR (EAPR), is the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate. Those terms have formal, legal definitions in some countries or legal jurisdictions, .

This information is typically mailed to the borrower and the APR is found on the truth in lending disclosure statement, which also includes an amortization schedule. The calculation for "open-ended credit" such as a credit card, home equity loan or other line of credit can be found here. Archived from the original on 17 April When you think about getting the best mortgage home loan, you probably think about getting a nice, low interest rate.

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An annual percentage rate (APR) is a broader measure of the cost to you of borrowing money, also expressed as a percentage rate. In general, the APR reflects not only the interest rate but also any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.

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.

The APR is intended to give you more information about what you're really paying. 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. Get a call back from one of our lending specialists. We ask for your ZIP code because we need to know your time zone so we can call you during the appropriate business hours.

Generally you pay points to the lender in order to lower the interest rate on your mortgage. A lower interest rate means the lender will make money in the long run on the loan, so he will charge you the point fee upfront to help make up for the profit loss. With the APR, that amount would be added into the base interest rate to have the rate more accurately reflect the cost of the loan. The other main fees added into the APR are the loan closing costs. These include things like the application fee and private mortgage insurance.

Any service the lender provides during the processing of the loan is included in the APR. Closing costs can total anywhere from a few hundred to a few thousand dollars depending on the location and price of your home. So consider the previous example in terms of the APR. Add the points to the loan amount to get an Adjusted Balance. Find the monthly payment on the Adjusted Balance. Return to the original loan amount, and find the interest rate that would result in the monthly payment found in step 2.

This is the APR. One point is one percent of the actual loan balance. Next, calculate the monthly payment using the loan's interest rate and the Adjusted Balance. We solve for the APR the way we solve any high-order polynomial: