Why Is The APR Different From The Interest Rate On My Home Mortgage?

By Kevin Landis

This article will help you understand why it is that the loan rate is marked as one percentage, while the APR itself may be another rate entirely.

What is the percentage?

The computed percentage is probably the simplest thing to figure out. It simply states what the percentage rate would be if there were no fees charged at all. Since this directly affects your monthly payment, you should definitely look at it in order to get your true APR calculated. For instance, a $200,000 loan at 5% interest. Your monthly payment on a 30-year loan, if there were no closing costs, would be $1,073.64.

Why Is The APR Different From The Interest Rate On My Home Mortgage?

The APR was added by the government in the name of disclosure. It also helps you in understanding fees and how much more they can add to the loan. Suppose the fees were $3,000. They now take the new loan amount, along with the interest rate, and calculate a new payment. In the above example, the payment is now $1,089.75. They use this payment against your original mortgage amount of $200,000 and compute your APR which is now marked higher, at 5.13%.

So I should look for the lowest APR when I apply for a mortgage?

Not necessarily. There are more questions you should ask in addition to looking at the APR. When you ask “Why Is The APR Different From The Interest Rate On My Home Mortgage?” you should also ask how comprehensive the given APR is. For instance, appraisal fees, credit report fees and inspection fees may not be counted. In addition, a lower APR may come with a higher prepayment penalty. The more ethical the banking company, the more disclosure they will give you on your loan, so be ready to ask more than just “Why Is The APR Different From The Interest Rate On My Home Mortgage?”

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1. What Factors Determine The Annual Percentage Rate For A Mortgage Rate?
2. How Does LTV Affect Mortgage Interest Rate?
3. Do I Pay A Higher Interest Rate On A Fixed Rate Mortgage?
4. What Is A Mortgage Interest Rate?
5. What Is Included in My Monthly Mortgage Payment?