Interest Rate vs. APR - What’s the difference?

A common misperception is that your Annual Percentage Rate (APR) and interest rate are the same thing. They aren’t.

Your interest rate is the actual Note Rate.  (The rate used to calculate the interest based on the loan  balance each month.

APR is the note rate and the Prepaid Finance Charges (PFC) expressed as a percentage rate.

The APR is a way for you to be able to compare “apples to apples” when considering which loan offer to choose. It represents the cost of the loan shown as an annual percentage rate and includes the prepaid finance charges.  Not all of the closing costs are considered Prepaid Finance Charges.
The easiest way to explain, would be that If you were paying cash for the home you would not have any prepaid finance charges.  Since you are getting a loan the Prepaid Finance charges are used to calculate the total cost of the loan.

So why include it in your Loan Estimate if it’s so confusing?

The easy answer is that it’s required by federal law to disclose both the interest rate and the APR to you as the borrower. The primary reason is so that lenders can’t “hide” their fees and upfront costs behind low advertised rates.  

If you still have questions or would like to discuss a specific Loan Estimate you’ve received, please feel free to contact me or fill out the short form below for a no-obligation consultation

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