Rate vs. APR
Interest Rate and APR are probably two of the most commonly misunderstood terms in mortgage lending. Understanding what they really are and how they affect your loan can make you a much smarter shopper when looking for a mortgage.
The first misconception is that the APR (Annual Percentage Rate) is the rate of interest that you pay on the loan. APR is NOT the interest rate used to calculate your loan payments. If this were the case, lenders would not quote the Interest Rate and APR separately. Interest Rate and APR are two completely separate things.
The Interest Rate (not APR) is the true rate of interest that you are paying on your loan. This means that if you get a loan with an Interest Rate of 7.500%,
your monthly payments are calculated at 7.500% regardless of what your APR is. Pretty simple.
The APR shows you what your "effective" interest rate is after calculating loan fees into the equation. Take a look at this example:
John borrows $150,000 from Beacon Mortgage at an Interest Rate of 7.500% for 30 years. John's monthly payment for this loan is $1,048.21.
Now we will look at what the APR is based on different closing costs for the same loan. What you will see is that the more costs you have for the loan, the higher your APR will be. The monthly payment and true Interest Rate will not change. There is no need to worry if your APR and Interest Rate don't match, because they rarely will. Check out the table below: