Have you ever wondered why mortgage rates are quoted both in terms of interest rate and APR? And what is the difference? Quoting the APR became industry practice as part of the Truth in Lending Act, a federal law passed in 1968 to protect consumers by requiring the full disclosure of the terms and conditions of finance charges in credit transactions.
An interest rate is the cost of borrowing money expressed as a percentage. For example, if you borrow money at a 5% fixed interest rate for a year, the interest charged will be 5% of the total amount borrowed. Your interest rate, along with the term and loan amount, determines the size of your monthly principal and interest payment.
When shopping for a mortgage loan, there are several factors that may affect your interest rate, including:
- The length of the loan term (for example 30 years vs. 15 years)
- How much you are borrowing compared to the value of your home
- How you plan to occupy the home (primary residence, secondary residence or investment/rental property)
- Your credit score
- Property type (single family, condo, co-op, townhouse or multi-family)
- Mortgage program (for example FHA, VA, conventional or Jumbo)
Annual Percentage Rate (APR):
The Annual Percentage Rate (APR) represents the total cost of borrowing money for a mortgage – and includes certain closing costs, interest, finance charges and points – over the full term of the loan, expressed as an annual rate.
By helping you determine the true cost of your mortgage, the APR lets you compare different types of mortgages offered by different lenders. All lenders calculate the APR according to federal requirements and are required by law to provide the specific APR for your mortgage in the Truth in Lending disclosure.