Skip to main content

Interest Rates vs. APR

Buyers are often faced with the problem of choosing the best loan type to finance their home purchase, read further and get to know the difference between the interest rates and the APR.

When evaluating the cost of a line credit or loan, its best to clearly understand the difference between interest rates and the annual percentage rate (APR) as you could end up paying thousands of dollars for a home finance. The nominal interest rate or advertised rate is used when calculating the interest expense on your loan. Most homebuyers are still to understand that the interest rate and the APR are used for two separate costs of a home loan.

The interest rate is known as the cost of borrowing the principal loan amount. It can be fixed or variable depending on the agreed terms, but it is always expressed as a percentage. The Annual Percentage Rate (APR) is a broader measure of a mortgage cost as it is the combination of the interest rate and other costs such as broker fees, discount points, and some closing costs, all expressed as a percentage.

For example, if you were going in for a mortgage loan worth $200,000 with a 6% interest rate, you would have an annual expense of $12,000, or rather a monthly payment of $1,000. The APR is considered more effective to when comparing loans. Since it is expressed in percentage, it includes not only the interest expense on the loan but all fees and costs are included to be qualified for the loan.

The APR is always greater than or equal to the nominal interest rate, the only exception is in the case of a specialized deal where a lender agrees to offer a rebate on part of your interest expense.

When taking into consideration two different loan types, the lender offering the lowest rates is likely to offer more favorable rates, since most of the loan is financed at a lower rate. Most lenders normally get more confused when comparing two lenders and they noticed both lenders offer nominal rate and monthly payment with different APRs. In such a case, the lender with the lower APR is more preferable as they require fewer upfront fees and offering a much better deal.