In the confusing world of home buying, two terms often surface when discussing mortgages: the mortgage interest rate and the annual percentage rate (APR). As you begin the home buying journey or consider refinancing, understanding these terms is important. Today, we’ll not only unravel their differences but also shine a light on what fees are included in the APR, as specified by the Consumer Financial Protection Bureau (CFPB). Let’s get started!

Mortgage Interest Rate

First up, let’s talk mortgage interest rate.

What is it? Simply put, the mortgage interest rate represents the annual cost you’ll incur for borrowing money to buy your home, shown as a percentage. If you borrow $100,000 at a 4% interest rate, you’d theoretically pay $4,000 a year in interest, though with amortization, the real-world math gets a tad more intricate.

Why is it essential? Your monthly mortgage payment is largely determined by this rate. A higher interest rate will usually mean a higher monthly payment and vice versa.  Do keep in mind though as you shop for a home online, your monthly payment will also include taxes, insurance, and possibly mortgage insurance and homeowners association.  It is important to include those numbers when budgeting for your new home.  A licensed professional loan officer should be able to help you determine those costs.

Annual Percentage Rate (APR)

Shifting focus, let’s discuss the APR.

What is it? The APR is a more comprehensive gauge of borrowing costs. Yes, it includes the mortgage interest rate, but it also wraps in a variety of costs and fees associated with the loan. Consequently, the APR usually runs higher than the simple interest rate.

Why is it vital? The APR offers an encompassing view of your loan’s annual cost, making it a powerful tool for comparing different mortgage offers. If two loans have identical interest rates but varying APRs, it’s a clear indicator of differing fees and costs between them.

So, what fees are included in the APR as per the CFPB? 

Just a side note, not all lenders interpret the CFPB requirements the same, so the calculation is not always consistent between all lenders.

  • Lender fees
  • Discount fees
  • Transaction and set-up costs
  • Private mortgage insurance (PMI) and government mortgage insurance.
  • Loan origination fees
  • Underwriting fees
  • Processing fees
  • Funding fees or other miscellaneous fees.

It’s worth noting that some costs, like home inspections, appraisal fees, and credit report costs, are not factored into the APR.

The Significance of Both Rates

  1. Clarity: These rates are in place to provide borrowers with a lucid understanding of their loan costs. An alluring low interest rate can’t mask high fees; the APR ensures those are apparent.
  2. Comparison: Assessing both rates is essential for making an educated loan choice. It ensures you aren’t beguiled by a seemingly low interest rate that masks high hidden fees.  If there is a big difference between the interest rate and the APR, then you really should look closely at the actual cost of the loan.  You should also always request a cost worksheet that details the complete list of fees. 
  3. Budget Planning: The interest rate will help you calculate your monthly payment, while the APR can guide your understanding of the loan’s total cost.

In Conclusion

Remember:

  • Mortgage Interest Rate: Exclusively the annual cost of borrowing your loan amount.
  • APR: A comprehensive representation of the loan’s yearly cost, including interest and specific CFPB-stipulated fees.

Both metrics are indispensable when seeking clarity on your mortgage. As you pursue your home financing journey, may this knowledge empower you to make informed decisions.

If you would like a second opinion are loan comparison of your mortgage offering, you are welcome to send us a copy of your estimate and allow us to provide you a FREE No Obligation Second Opinion just to make sure you have the best possible terms available for your circumstances.  Just give us a call at (214) 945-1066.   Happy home financing!

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