What Is APR (Annual Percentage Rate) and How Does It Works?

Understanding Annual Percentage Rate (APR)

Jun 06, 2017 (0) comment

A mortgage loan program has various parameters and guidelines that you need to study before finalizing the right loan. Shopping for the right loan can be a daunting and intimidating task, especially since you need to study various factors such as the interest rate, down payment, mortgage fee, and more. The Annual Percentage Rate (APR) is one of the most important parameters that you should study before you commit to a loan.

Let’s review what APR is and what you should take into account before finalizing a loan.

What is an Annual Percentage Rate (APR)?

An Annual Percentage Rate (APR) is the total interest paid by you on a loan, expressed in terms of annual rates. A lower APR means a lower monthly payment. Although logic says that the lower the APR, the less stress on your wallet, you may still be required to have higher mortgage points and additional fees in the case of loans with lower APRs. In these cases, it is better to choose a home loan program with higher APR after considering your liquidity, payment, and financial position.

How is APR calculated?

Suppose you borrow $1,000 with an APR of 4% over 3 years (assuming an annual APR calculation).
Year 1 Interest: 1,000 x 0.04 = 40 and 40 + 1,000 = 1,040
Year 2 Interest: 1,040 x 0.04 = 41.6 and 41.6 + 1,040 = 1081.6
Year 3 Interest: 1081.6 x 0.04 = 43.27 and 43.27 + 1081.6 = 1,124.87
In total, you’ll pay back $1,124.87 at the end of the loan period.

What is the difference between APR and interest rate?

APR is a broader term since it not only involves interest rate, but also parameters such as mortgage points, lender fees, and other related fees and charges. Thus, a lower interest rate does not necessarily mean a lower APR.

At Drew Mortgage Associates, we help you shop for the right loan that meets your financial requirements. We understand that mortgage loan application can be an arduous task, so we try to break it down in simple terms and walk you through the process.

For more financial updates and information, please visit: https://www.drewmortgage.com/fha-streamline-refinancing/


Apply Now