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What’s the difference between APR and Interest Rates?

What’s the difference between APR and Interest Rates?

Interest rates and annual percentage rates (APR) are often confused. What is the difference between APR and Interest rates anyway? Let’s take a look at these terms and how each one impacts your loan. 

Interest rates 

The interest rate is the rate of interest the lender charges the borrower for the loan. For example, a $300,000 mortgage with a 4% interest rate would have an annual interest expense of $12,000, or $1,200 a month.

Interest rates are influenced by the federal funds rate that is set by the Federal Reserve, or the Fed. The federal funds rate is the interest rate at which banks lend each other money overnight.

APR=Annual Percentage Rate

The APR on loans is the approximate annual cost of borrowing money from a financial institution.

The APR includes the interest expense and all other fees and costs involved in taking out the loan. These expenses can reflect closing costs, loan origination fees, mortgage insurance, broker fees, and rebates. The APR is expressed as a percentage of the entire loan amount and will nearly always be greater than the interest rate.

On a $300,000 mortgage with loan costs totaling $5,000, the loan amount is now $305,000. The 4% interest rate is then used to calculate a new annual interest expense of $12,200. To determine the APR on a loan, divide the yearly payment of $12,200 by the original loan amount to get 4.06%.

Which number is more important to consider when taking out a loan? 

When comparing rates on two different loans, the loan with the lower interest rate will generally offer a better value, since the bulk of the loan amount is being financed at a lower rate. Usually, the loan with a lower nominal rate will also feature a lower APR.

Borrowers need to consider the length of time they plan to stay in their homes. Most borrowers will need to purchase discount points upfront to qualify for lower-APR loans. It can take more than five years for the borrower to break even on these costs. Consequently, for homebuyers who plan to move within the next decade or sooner, it may make more sense to choose a loan with a higher APR and fewer upfront costs.

Well, they are a little different. What’s the difference between APR and Interest Rates? Now you know the answer. You are now backed with knowledge and that means more power for you. If you want to know what the current Elevate interest rates are check them out here: Elevate Rates.


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