What is an Interest Rate?
An interest rate is the price of money, and a home mortgage interest rate is the price of money loaned against the security of a specific home. The interest rate is used to calculate the interest payment the borrower owes the lender.
The rates quoted by lenders are annual rates. On most home mortgages, the interest payment is calculated monthly. Hence, divide the rate by 12 before calculating the payment.
This is how your monthly Principal and Interest Payment is calculated for your home mortgage. With the rate being amortized over a certain term (for instance, 30, 20, or 15 year) with more interest being paid at the beginning of the loan compared towards the end of the loan.
Interest Rate and the APR (Annual Percentage Rate)
Whenever you see a mortgage interest rate, you are also likely to see an APR, known as the Annual Percentage Rate, which is almost always a little higher than the rate. The APR is the mortgage interest rate adjusted to include all the lender costs like Origination Fees, Processing Fees, and Discount Points/Credits. This calculation takes into account these charges to determine an annual percentage of those fees.
Your payment is not based on the APR but is based on the interest rate separated from your costs. APR is primarily there to give you a better idea of total loan cost and to be used to compare loans from different banks, lowest APR is the cheapest loan (not necessarily the best loan, sometimes cheap is just cheap).
Still Need Help?
If you still need help figuring out Interest Rate versus APR and what it means for a home mortgage, we are more than happy to answer these questions for you over the phone or in person. Home mortgages and various lending jargon can be tough to understand, but the Blink team is here to help you understand all of your options, and make sure you pick the option that best suits you and your needs.
