Yes interest rates dominate the news, but we would argue understanding APR (Annual Percentage Rate) is a bigger factor when evaluating the total cost of your home loan. A recent study we conducted revealed that 5 out of 6 home shoppers focused solely on the interest rate when comparing lenders, aiming to find the option that saves them the most money. Only one participant mentioned that APR is what really matters. However, APR provides a more comprehensive view of your loan’s cost.
How is APR different from interest rates?
APR includes the interest rate plus any additional fees, such as points or origination fees (though we don’t charge these).
APR factors in the interest rate as well as all of the other fees included in the loan cost. Without looking at APR, you might see a very low interest rate, which appears too good to be true, because it is coupled with thousands of dollars of hidden fees.
| Fees and Charges | Interest Rate | APR |
| Interest on the Loan | Yes | Yes |
| Loan Origination Fees | No | Yes |
| Underwriting Fees | No | Yes |
| Mortgage Points | No | Yes |
| Mortgage Insurance Premiums | No | Yes |
| Other Closing Costs | No | Yes |
Is a lower APR always better?
Generally, yes. A lower APR means lower overall costs for your loan. However, make sure to understand what’s included in the APR calculation, as it can affect your decision.
The APR calculation will vary by lender, so it is best to ask your loan officer directly for a breakdown.
Your lender should provide a Loan Estimate document, which details the APR and outlines what fees are included in the calculation. Review the “Closing Cost Details” and “Loan Costs” sections to see how APR is calculated in more detail.
How does APR affect my loan over time?
APR gives you a broader perspective on the total cost of borrowing, including both interest and fees.
How do points and APR relate?
Points are upfront fees paid to reduce your interest rate. While buying more points can lower your interest rate, it actually increases your APR because points add to the overall cost of the loan. APR is designed to account for these points, giving you a clearer picture of the true cost of the loan.
This is especially helpful when comparing loan options on websites like Bankrate, or Nerdwallet, where interest rates might appear misleadingly low due to points (the APR is next to interest rates on rate tables such as these). By focusing on APR, you can more accurately assess which loan offers the best overall value.
How does my credit score affect the APR I’m offered?
Your credit score impacts the interest rate you’re offered, which in turn affects your APR. A higher credit score can secure a lower interest rate and APR.
Should I focus on interest rate or APR?
The interest rate is crucial as it directly affects your monthly payments and overall loan cost.
APR is important for understanding the total cost of your loan when looking to compare loan offerings, and is generally more transparent than an interest rate, which could be skewed low due to fees.
While both are important, if you are quickly comparing loans, focusing on APR will give you the most straightforward understanding of the total cost of the loan.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.