Buying a Home? You Need to Understand APR

Whether getting a loan or a credit card something a borrower must pay attention to is the APR.  APR is the annual percentage rate which is the interest and fees that will be paid by a borrower when using the money from a lender.  It is the overall cost the borrower incurs for using borrowed funds for the one-year time frame.  

Defining APR and Fees

In most cases, APR is different from the “interest” people often refer to it as the actual amount a borrower will owe.  This is because the interest rate and extra fees are rolled into one rate for the period of time. As a result, APR is a useful tool borrowers should use to determine what they are going to pay.

APR is also the number to focus on when comparing different lenders.  While lenders may advertise lower interest rates it is the APR that can make a significant difference.  For example, one lender that is offering an APR that is significantly higher than another lender is charging more for “hidden” fees and will cost the borrower much more money over the life of the loan.  

Interest Rates

There is no rate that is more important than another.  A borrower must look at both the interest rate and the APR to understand the full scope of what they are borrowing.  Both of these numbers will come together to give the borrower their overall costs while they carry the debt.

The APR is not going to contain any compounding interest.  This is something that borrowers need to pay attention to or risk paying a lot more.  Compound interest is the added interest that is tacked onto the existing interest. A person who is not making payments that cover the interest for the month will pay interest on the balance that is left over.  

Interest Rate Factors

Although interest rates may increase or decrease by seemingly minuscule amounts they can cost a borrower a lot more money over the life of the loan.  This is why having the lowest possible interest rate is what borrowers should look for to save the most money possible. Keep in mind that the APR will change lender to lender and it is always needed to research lenders before using them to borrow money.

A factor to focus on is having a high credit score.  The credit score is a score given that shows lenders the risk a borrower poses.  This score is determined by using how many debts a borrower has, if they make payments on time, what type of debts they have, and much more.  Working on a higher credit score is the first step to a lower interest rate.

Lenders prefer to see borrowers who have a significant amount of money to put down on a property.  Down payments can help to lower interest rates because the lender has to lend less money to the borrower.  Even the location of the property can change this rate because of the local housing market influence.  

Each loan will have different stipulations for where the interest rate will be set.  Loans may also change the interest rate at different increments as outlined in the original agreement.  Using a loan that is for a shorter period of time is beneficial because lenders connect lower interest rates with these borrowers.  

A borrower has to know the difference between interest rates and APR.  While they are similar terms they can have totally different impacts on how much a borrower pays through the life of a loan.  When obtaining a mortgage there are many factors that can change both interest rates and APR so the borrower must pay attention to a variety of moving parts to get the best deal possible.