Clients often tell me they heard about an amazing interest rate advertised online or on the radio. They ask me, "Why can't my lender give me that rate?" I then ask, "Did they mention what the annual percentage rate (APR) is?"
Often these attractive rates can be misleading. They assume you have perfect credit and no outstanding debt. More importantly, they don't always reveal the "real" cost of the loan which is expressed in the APR.
There are many costs associated with taking out a mortgage:
- The interest rate
- Points
- Fees
- Other charges
The interest rate is the cost you will pay each year to borrow the money. It can be a variable or fixed rate, but it’s always expressed as a percentage. It does not reflect fees or any other charges you may have to pay for the loan. The interest rate is almost always lower than the APR.
An annual percentage rate (APR) is a broader measure of the cost to borrow the money. Also expressed as a percentage, it reflects not only the interest rate but includes points, mortgage broker fees and other charges that you pay to get the loan. These extra fees can vary from lender to lender.
This is why lenders and banks usually advertise the interest rate and not the APR (which can significantly impact your mortgage payment). With all of this to consider, it is important to find a lender you trust and who will explain which loan package is best for you.