The APR, also known as annual percentage rate, is the cost of acquiring a mortgage loan. Precisely, it is the percentage measure of the cost of borrowing money and determines the yearly charges till the loan is settled. On the other hand, an interest rate, expressed as a percentage, is merely the expense you pay each day for the borrowed money till it is compensated.
These are financial terms for acquiring a home mortgage loan. The two terms might be new though if you’re buying a home for the first time. In this article, however, we have explained everything you will be required to know when purchasing a new home.
The Mortgage Interest Rate
This is the amount in percentage rate you are charged each day the borrowed money is owed. Contrary to what most of us think, it is not the fees or charges you pay for the loan. The interest is computed per day using an amortization formula based on the current outstanding mortgage balance. In other words, each month you are charged a fraction of the principal amount alongside the interest accrued for the month.
What Determines the Mortgage Interest Rate?
Just like any other commodity, mortgage rates fluctuate from day to day depending on the housing market requirements. However, with the right information, even a fraction of a percentage saved from your interest can save you thousands of money over the mortgage’s compensation period.
The Key Factors that affect Your Interest rate
1. Credit Rate
This is a numerical representation of your credit-worthiness. It is determined by your credit track record of repaying your debts; from credit card funds to college funds. Ordinarily, clients with higher scores get lower interest rates than those with lower scores. The scores range from 850 for a perfect score, 759 and below for a good score and 699-650 for a fair rating.
2. The principal amount and down payment
A higher deposit amount of the mortgage investment earns you a better rate. If your down payment is a little less than 20% of your mortgage, you may have to incur an extra charge of paying for private mortgage insurance, PMI. The PMI varies from 0.3% to 1.15% of the home loan. Again, depending on your mortgage type or on the current conditions, your closing costs and mortgage insurance may be included in your mortgage amount.
3. Home location
Depending on where you are buying your home, the mortgage rates can vary due to other factors.
4. Loan type
The loan type will also determine the interest rate. The most common mortgage type is the conventional mainly meant for clients with well-established credit records, substantial assets, and a steady income. However, if your finances aren’t as high, you can qualify for a Federal Housing Administration loan, a U.S. Department of Veterans Affairs loan or an Agriculture Rural Development loan.
5. The duration of your loan
Shorter-term loans have lower interest m
6. Type of interest rate
Depending on whether you are a fixed-rate mortgage consumer or an adjustable-rate mortgage consumer, your interest rate may vary.
What Determines the APR?Since APR includes the mortgage interest rate, the discount points, the mortgage origination fees among other costs, it is usually higher; often ranges from 0.20% to 0.25%. Therefore, the higher your APR, the higher your payments. As a result, it’s advisable to compare both the interest rate and the APR when looking for a mortgage.
Furthermore, when lenders advertise the APRs, they offer their rates under ideal terms. This means borrowers with outstanding credit records enjoy better rates than those with less impressive records. However, irrespective of your circumstances, the prices can be higher. Moreover, lenders with lower APRs require high installment fees; their point’s requirements, insurance subsidies and origination fees are often higher to justify their lower rates.