After you have done all your mortgage shopping, secured your best rate and think everything is good to go, you get presented with your mortgage documents and notice there are 2 different interest rates displayed. What’s the deal with that?
Well, basically, the interest rate will be the lower of the two and usually the one you base your decision on. It is in fact the amount of interest you will be charged on the amount that you borrow and should be your reference point.
The higher rate is referred to as the APR (Annual Percentage Rate). This rate encompasses your annual cost of funds over the term of the loan, but also all the other costs associated with closing your loan (i.e. closing costs, appraisal, fees, etc.)
So, if there is a great difference between your interest rate and APR, it usually indicates higher costs. The term of the loan is also relative to the APR. If you are borrowing funds for 1 year vs. 5 years, the APR will be higher as the costs are added to your one year interest total instead of being spread over 5 years.
You should always start with the base rate as your reference point. However, if looking at the APR and you are comparing, you have to compare apples to apples. That means, you must compare term to term, fixed rate to fixed rate, etc.
VERICO The Financial Forum Ltd.
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