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With mortgage loans, APR is complicated because it does include more than just your interest charges. Any quotes you get might or might not include closing costs that you’ll have to pay or other payments required to get your loan approved (such as private mortgage insurance). If you are putting less than 20% down lender charge monthly PMI also called Private Monthly Mortgage. Loan with monthly PMI have higher APR when comparing APR for loan with no PMI.
You can’t simply rely on an APR quote to evaluate a loan. You need to look at each and every charge and expense related to your prospective loan in order to judge whether or not you’re getting a good deal. In addition, look at the bigger picture – you need to know how long you’ll be using a loan to make the best decision. For example, one-time charges up-front may drive up your actual cost on a loan – but the APR calculation will assume those charges are spread out over a longer lifetime (and therefore the APR would look lower). If you're going to pay a loan off quickly, APR tends to underestimate the impact of up-front costs.
What is the difference between an interest rate and an APR?
There are many costs associated with taking out a mortgage. These include the interest rate, points, fees, and other charges.The interest rate is the cost of borrowing money expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.
An Annual Percentage Rate (APR) is a broader measure of cost to you of borrowing money. The APR reflects not only the interest rate but also the points, broker fees, and certain other charges that you have to pay to get the loan, including certain of your closing costs. For that reason, your APR is usually higher than your interest rate.
Interest Rate & Closing Cost
When shopping for the best deal, always depends on two main thing interest rate and closing cost or fund to close. Interest rate is what you monthly payment are calculated. Low interest rate will make your monthly payment low. APR is not used to calculate your monthly mortgage payment. Secondly pay attention to what your closing or fund to close. The best deal will be the loan with lowest interest rate and lowest closing cost. To find out monthly payment, use Mortgage Calculators.