The annual percentage rate gets a lot of borrowers confused when shopping for a loan. We know we should be looking for competitive interest rates, but what does the APR mean? How does that play into our monthly payments?
Well, in short, it doesn’t. But it is a useful tool to guide your loan shopping process. Let us clarify it for you.
Understanding the APR
The “annual percentage rate” is kind of a misnomer. An APR is a means of showing you the “true cost” of the loan you’re applying for.
- the total amount you’ll pay in interest over the life of the loan
- the associated lender fees to obtain that loan
- a percentage representation to show you how it compares to other loan options
It’s not the same thing as your interest rate, so has nothing to do with how much you pay each month. It just shows you the total cost of using one lender vs. another.
How to Use the APR
You can use the APR to make sure you’re getting the best deal possible. Our friends at Bankrate calculate the APR for loans based only on the lender-based origination fees. This makes it a lot easier for you to weed out all the industry-standard fees.
Below is an example of a Bankrate breakdown. We boxed the APR column in red.
Notice that there are no upfront costs or fees for loan #1, so the interest rate and APR are the same. This just means that this loan does not cost you anything else on top of the interest rate.
In the second option, you would need to pay 0.405 points to obtain this rate, costing you $972 upfront. The APR for this option is a little bit higher because it is demonstrating that there is an additional cost involved in this loan.
Again, all the APR does is further illustrate how the costs and fees play into your desired loan using a percentage. It doesn’t influence anything and doesn’t necessarily show you what loan is better for you. Your best options are the ones that align most closely with yourpersonal and financial goals.
How Does the APR Affect Me?
After you’ve chosen your loan and begun the application process, the APR doesn’t have any impact on you ever again. It’s only useful while you’re comparing lenders in the initial shopping stage.
In summary, don’t stress about the APR. All you really need to be concerned with when shopping for your loan are: the interest rates, points and fees are, the type of loan, and the loan term. Getting connected with a licensed loan officer is the best way to learn about all your options in order to find your right fit. Give us a call today so we can guide you to your perfect fit and get you in that dream home ASAP!