Do you know the difference between interest rate and APR? Let’s face it: finance is always tricky, especially when it comes to your new home! It’s absolutely normal for home buyers—especially first-time home buyers—to get confused over some of those little details that go into all of the financing for a new home.
However, knowing the difference between interest rate and APR is a critical aspect of the home buying process. With such a complicated, large transaction—one that very well might be the largest transaction of many people’s lives—the difference between interest rate and APR (annual percentage rate) is one that every home buyer needs to be aware of in order to get a good grasp on how much the home will cost and how much they can afford.
So, what exactly is an interest rate? What is the annual percentage rate? How do these two financial elements play into the overall package of financing and paying for a home? We’ll break down these two terms and give you all of the information you need to know in order to ensure a seamless transaction for your new home.
Before we go into the difference between interest rate and APR, let’s take a close look at the definition of both of them. We’ll start with the interest rate.
When you express interest in a house and go through the home buying process, you’re generally going to have to take out a mortgage from a lender in order to pay for it (unless, of course, you can put down all of that cash upfront). Mortgage lenders aren’t going to go ahead and lend you all of that money for nothing. Instead, they’ll assign interest to whatever amount of loan they provide to you to purchase the house so that they can make a profit on the deal and you can move into the house.
The amount that they’ll charge you is the interest rate. This interest rate could be different for different couples and different transactions at different times. There are a few big factors that go into this. The first? The “interest rates” charged by the Federal Reserve to the different banks that make these transactions. You’ll often see the interest rates mentioned across economic coverage in the news. Cutting interest rates is a popular tactic to help boost the economy; at the same time, raising interest rates in strong economic times is another popular tactic to help slow things down and prevent economic crashes. These rates change very often, sometimes by the day. It’s a good idea to be on the lookout for periods with lower interest rates in order to get the best deal possible on your mortgage.
The second popular factor in establishing your interest rate is the party itself (that’s you). Your credit score is the other big determiner for your interest rate. If you have an excellent credit history and you’ve paid all your bills on time in the past, then you should have a good credit score and should be able to unlock better rates for your real estate transaction. If your credit score is a bit shaky, you might have a hard time finding an excellent deal for your interest rates.
Again, these interest rates fluctuate by the day and by the organization that offers them. It’s imperative you do your homework when it comes to interest rates. Shop around, make your comparisons on different websites, and ask others that went through the process if they have any recommendations. With enough research, you should be able to find an excellent deal.
Let’s turn to the second part of the “difference between interest rate and APR” question – what is APR? The Annual Percentage Rate is different because it takes into account all of the money you may have to pay back to the lender, not just the interest rate. In many ways, the Annual Percentage Rate (APR) is a more accurate account of the money you’ll actually have to pay back over that period of time. It includes all of the different fees and costs the lenders or other parties might tack on in order to inflate the cost. Those include things like loan origination fees, broker fees, insurance premiums, and much more. It will also take into account any “points” that you might purchase to cut down on the mortgage upfront.
The main difference between the interest rate and APR? The interest rate is just one part of the whole that you’re going to pay; take a look at the APR rate among the competing mortgage lenders in order to see just how much you’ll have to shell out over the life of your mortgage.
Now that you’ve got a grasp on the difference between interest rate and APR (annual percentage rate), how can you start attacking all of the other elements of the home buying process? This long, extensive, and winding road to homeownership demands a reliable partner to guide you to success—and that’s where the talents of LemonBrew come in.
Turn to LemonBrew Lending for all of the mortgage support you need to get the loan that’s right for you. Our team of trusted advisors is here and ready to educate you all about the borrowing process, enabling you to make informed decisions to help reach your homeownership goals.
We’re ready to work with you for both purchasing and refinancing. We work closely with brand-new, first-time home buyers, guiding them through every step of the process—and ensuring you close on time and effortlessly. We also take advantage of interest rates staying historically low; LemonBrew Lending allows you to save your hard-earned money with custom loan term options, reducing interest rates or powering you to cash out equity on your home. Ready to get started?
That’s not all LemonBrew can help you out with! Be sure to turn to LemonBrew for:
- Buying a home. LemonBrew can connect you with a knowledgeable, professional local agent to help you find your dream home in the area you want to be at.
- Selling a home. Turn to LemonBrew to connect to a network of vetted, qualified sellers to get your house sold as quickly as possible.
- How about title insurance for your home? LemonBrew Abstract delivers transparently fresh title and escrow services to help get this “last step” in the home buying process completed.
- For real estate agents: connect with LemonBrew to explore the best matches to buyers and sellers from around the country, with no up-front costs.
One more thing to check out! Be sure to explore the in-depth LemonBrew blog, with beneficial deep dives into the biggest questions in the real estate industry’s process. Check out articles including “How to Get a Home Improvement Loan,” “How to Get a Home Loan With Bad Credit,” and “Questions to Ask a Real Estate Agent.”