Understand The Difference Between Interest Rates And APRs
Today more than ever it is important to be a wise borrower, because it is important to get the right loan, especially when it comes to your mortgage. When it comes to loans, you often hear the words interest rates and APRs and it is easy to think, I sort of understand what those mean and move on. However, understanding exactly what they mean is imperative to successful and smart borrowing; and, it will enable you to be able to pay back your loans on time. For this reason, make sure you understand the details of interest rates and APRs so you know what you are talking about when you speak to a lender.
It is not uncommon to assume that interest and APRs are the same thing, because both of them relate to fees we incur for borrowing money. However, although they may seem similar, they are actually different and it is important not to confuse the two. Understanding the difference will help you understand whether or not you will be able to pay back the loan or not, and that will be imperative when you decide whether or not to actually borrow from the lender.
It is easier for most people to understand interest because interest is more straightforward and simple. For example, when it comes to your mortgage, usually your interest is determined by the principle and the term of the loan. However, many nave people assume this is the only factor affecting interest and the overlook other important factors that can affect interest rates.
Some specific factors usually affect interest including the type of loan you decide to take out - fixed loans, ARM loans, etc. In addition, your mortgage interest rate also considers the amount of your loan versus the value of your home. Lastly, sometimes, interest is factored based off the type of property you are purchasing. The interest will probably be different if the home is your primary residence, a second home, or an investment property.
One of the greatest things about a mortgage is the opportunity to buy down your interest rate by paying more up front. When you buy down you receive a point for 1 percent of your total principle that you pay up front. For example, you could buy down 5 points in interest if you paid $5,000 up front for a $100,000. Buying down interest rates are not only a great way to lower the interest rates, but they also save you money and can possibly allow for tax benefits.
If you do not know how to calculate interest, it is actually quite simple. You divide the total amount of interest charged from the loan by the total amount of the loan; therefore, if your lender loans you $10,000 and charges you $100 in interest your interest rate is (100/10000) x 100 percent = 10 percent. Computing interest rates always simple, even if the numbers are a little bit more complicated.
Moving on from interest rates, APR (short for Annual Percentage Rate) figures the total cost of a mortgage including closing costs and interest over the entire term of the loan. You often hear APR quoted in an annualized for, because APR is a yearly calculation. The nice thing about the APR is that it is a better reflection of the costs to anticipate in the future because it takes into consideration more than just your future interest. It is important not to overlook APR, because if you do, you will overlook important costs that you might not realized are coming in the future.
The calculation for APR is not as easy as interest rates because it involves so many factors, however this is why it is often a better indicator for the future. It usually involves amortization schedules and complex equations, therefore you can count on an accurate rate.
When you do apply for a mortgage, do not be surprised when both the interest rate and APR are discussed. The rates will definitely vary given you credit score and the conditions of the market. Yet, those who better understand the terms will make more informed decisions when it comes to borrowing.
Also, although you may not have much control on the interest rates and APRs at the time, you do have more control on the controlling costs that come with your new mortgage. These costs are usually the initial cost like closing costs and mortgage insurance. Make sure to negotiate them with your lender because they have flexibility with them.
Also, because you are more informed about lending, you should shop around. You might be tempted to go with the first person that offers you a loan, however it might not be the best decision. Research and find the best choice for you.
It is not uncommon to assume that interest and APRs are the same thing, because both of them relate to fees we incur for borrowing money. However, although they may seem similar, they are actually different and it is important not to confuse the two. Understanding the difference will help you understand whether or not you will be able to pay back the loan or not, and that will be imperative when you decide whether or not to actually borrow from the lender.
It is easier for most people to understand interest because interest is more straightforward and simple. For example, when it comes to your mortgage, usually your interest is determined by the principle and the term of the loan. However, many nave people assume this is the only factor affecting interest and the overlook other important factors that can affect interest rates.
Some specific factors usually affect interest including the type of loan you decide to take out - fixed loans, ARM loans, etc. In addition, your mortgage interest rate also considers the amount of your loan versus the value of your home. Lastly, sometimes, interest is factored based off the type of property you are purchasing. The interest will probably be different if the home is your primary residence, a second home, or an investment property.
One of the greatest things about a mortgage is the opportunity to buy down your interest rate by paying more up front. When you buy down you receive a point for 1 percent of your total principle that you pay up front. For example, you could buy down 5 points in interest if you paid $5,000 up front for a $100,000. Buying down interest rates are not only a great way to lower the interest rates, but they also save you money and can possibly allow for tax benefits.
If you do not know how to calculate interest, it is actually quite simple. You divide the total amount of interest charged from the loan by the total amount of the loan; therefore, if your lender loans you $10,000 and charges you $100 in interest your interest rate is (100/10000) x 100 percent = 10 percent. Computing interest rates always simple, even if the numbers are a little bit more complicated.
Moving on from interest rates, APR (short for Annual Percentage Rate) figures the total cost of a mortgage including closing costs and interest over the entire term of the loan. You often hear APR quoted in an annualized for, because APR is a yearly calculation. The nice thing about the APR is that it is a better reflection of the costs to anticipate in the future because it takes into consideration more than just your future interest. It is important not to overlook APR, because if you do, you will overlook important costs that you might not realized are coming in the future.
The calculation for APR is not as easy as interest rates because it involves so many factors, however this is why it is often a better indicator for the future. It usually involves amortization schedules and complex equations, therefore you can count on an accurate rate.
When you do apply for a mortgage, do not be surprised when both the interest rate and APR are discussed. The rates will definitely vary given you credit score and the conditions of the market. Yet, those who better understand the terms will make more informed decisions when it comes to borrowing.
Also, although you may not have much control on the interest rates and APRs at the time, you do have more control on the controlling costs that come with your new mortgage. These costs are usually the initial cost like closing costs and mortgage insurance. Make sure to negotiate them with your lender because they have flexibility with them.
Also, because you are more informed about lending, you should shop around. You might be tempted to go with the first person that offers you a loan, however it might not be the best decision. Research and find the best choice for you.
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