When shopping for a mortgage or any type of credit product, for that matter, keep in mind that the advertised interest rate isn't the same as your loan's annual percentage rate (APR). Here's what you should know about the difference between a mortgage interest rate and APR.
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What's the Difference Between an Interest Rate and APR?
There are many costs associated with taking out a mortgage, including interest rate, points, and fees. While your interest rate is the cost you will pay to borrow money, it does not reflect fees or any other charges you may be required to pay for the loan.
The annual percentage rate (APR) refers to the annual cost of a loan to a borrower, including the interest rate and any other costs associated with getting a loan. For instance, if you are quoted a mortgage APR of 4.25 percent, that means that if all the interest, points, and any other loan costs were added up and the sum was spread evenly across the entire loan term, annual payments on that total would amount to 4.25 percent of the original loan amount.
The Federal Truth in Lending Act requires all consumer loan agreements disclose APR. Because lenders are required to disclose APR, consumers can use APR as a benchmark for comparing costs when shopping for a home loan.
For more information about purchasing and financing your first home, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers!