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For example, the financing company that I am currently looking at have this set up as the current Rates:
Program-Rate-APR
30 Year Fixed-6.500%-6.563%
20 Year Fixed-6.375%-6.457%
15 Year Fixed-6.125%-6.227%
I don’t understand why there are 2 sets of percentages.
PLEASE HELP!
The interest rate is the rate stated in the loan itself–say, 6% per year for 30 years.
The annual percentage rate includes the simple interest rate, but it also includes all other fees you pay to the lender, by whatever name the fees are called, for the privilege of having the loan. So the APR includes “points”, “lender’s fees”, the broker’s commission or “yield spread premium”, etc. The purpose of the APR, which is set in the Federal Truth in Lending Act, is to make it easier for consumers to compare one bank’s terms with a different bank’s. So if one bank offers “6.25% with 2 points” and another bank offers “6.35% with 1 point” they will both have to state their APR’s. The APR is the total interest and other fees you pay over the life of the loan and the bank with the lowest APR is offering the best deal. So concentrate not on the simple interest rate, which doesn’t include all the fees you have to pay, but on the APR, which gives the true comparable cost.
Interest rate is the rate that quoted, say for example 6%. The APR or Annual Percentage Rate is the true rate that you are paying. Annual percentage rate takes into account any fees and is a true measure of the amount of interest you are paying annually. It’s kind of hard to explain without giving you a lesson in the principles of time value of money, with takes into account compound interest which is how a mortgage is calculated. Most people think that interest is simply for example multiplying a 100,000 mortgage by 6%, and that the amount of interest you would pay in one year. In most cases interest is calculated on a daily basis, which means you take that 6% and divide it by 365 and you get your daily interest rate. When you divide it out you roughly get .0001643 which you multiply to the balance on your mortgage. So for the first day on a 100,000 mortgage you are adding about 16.43 worth of interest. The next day you take that same daily interest rate and multiple it to the new balance of 100,016.43 and you get a slightly higher amount, and add the new amount of interest to 100,016.43 and you do this each day until you make a payment. Basically you are paying interest on interest on any loan. Now to the route of your question apr is the actually rate that takes into account the interest on interest and is alway higher that the stated interest rate. I would need a financial calculator to give you what the apr is in this situation, but its probably like 6.16% or something. The apr rate takes all of that into account and is more of a true measure of what you are paying in interest.
Some helpful tips of avoiding paying more interest is to put money down which would lower that 100,000, also to pay extra on your mortgage which lowers the principal amount and basically you are calculating interest on a lower amount which means a lower amount of interest would add up. Another thing that could save you a lot of money on your mortgage in interest is to make your payment more frequently. For example if you pay 1000 a month on your mortgage, pay 500 every two weeks which equals the same amount of money you are paying monthly, but this lowers the amount of interest because you pay interest on interest so the more frequent your payment the lower your principal balance and the lower the daily amount of interest will be. I hope that I went into enough detail not to bore or confuse you.
The first percentage (Rate) is the rate advertised by the lender and may not take into account certain fees or other costs of the loan. The second percentage (APR) is the annual percentage rate and DOES include fees and other costs associated with the loan. The APR is intended to standardize the way rates are presented so the borrower has an easier time comparing one loan package to another.