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Morning it’s brian schmidt over at cross country mortgage hope you’re having a great start to your week i thought i would talk about um something that we get a lot of questions about i it seems like we talk about this probably three or four times a day every single day probably every day of the week actually um at least in my world um so what we’re going to
Talk about today is interest rate versus apr there’s a lot of confusion about what this is and and what it means like what apr actually means and uh what i wanted to make sure that you’re clear of today is that there’s two different numbers and what they’re comprised of um so first and foremost interest rate is the actual rate that you’re going to be paying on
Your mortgage so let’s say um when you close your interest rate was i don’t know three percent well that’s your actual interest rate what confuses people is when they go to closing or they’re trying to figure out who they should be working with for a mortgage lender they look at apr but they don’t understand what apr is consisting of and a lot of times apr is not
Calculated consistently from one lender to the next comparing apples to apples so what is the apr the apr actually includes your one-time closing cost that you have to pay to close on the mortgage so it can be lender fees title fees appraisal close credit report paying for points or mortgage insurance all these things have to be factored into your actual apr and
What happens a lot is the apr that’s disclosed is typically on a loan with 20 down and that’s usually not what most people are doing so aprs is a number that’s kind of elusive so what i want to make sure you understand is how that’s calculated so let’s say you are buying this home and you close and your interest rate is three percent on a 100 000 mortgage um
Actually let’s just use four percent because i have the math sitting here that’s easier to explain um so let’s say it’s four percent interest rate on a hundred thousand dollars that means you’re going to pay four thousand dollars a year interest well let’s say when you go to closing you have to spend five thousand dollars in closing costs well those five thousand
Dollars of closing costs have to be converted to an interest rate over the life of the loan so if you have a 30-year mortgage we’re going to take five thousand dollars and divide it by 30 years which is 167 dollars per year and then that has to be added to your base rate the actual interest rate you’re going to be paying and in this example of 4 well 4 plus 4
Times a hundred thousand dollars is four thousand dollars per year so to get the apr we would take the actual interest rate that your interest you’re paying the four thousand plus the 167 per year over 30 years that you’re paying in closing costs and add them together so 41.67 and that divided by your loan amount would mean that your apr would be 4.1667 interest
So your apr is always going to be higher than what your actual interest rate is and if you’re paying for mortgage insurance which most people are that has to be included in the apr calculation and what i can share with you is most lenders when they’re advertising they’re advertising a 20 down mortgage with no mortgage insurance so unfortunately aprs that you see
Marketed a lot of times are going to be completely different than what reality is based on what you may actually end up choosing to do so um so number one interest rate is based on what you actually pay per month so that’s going to affect your monthly payment but the apr is actually what it costs you over time for the purchase of that home using that mortgage
So apr does not affect your monthly payment it’s showing you your total costs where interest rate is what you’re actually paying per month so i hope that’s clear i hope that’s helpful if you have questions about anything uh don’t hesitate to reach out to us the number is 847-603-4778 have an awesome day
Transcribed from video
Interest Rate vs APR By The Bryan Schmidt Mortgage Team
