When you get a mortgage, you are charged two different rates–the annual percentage rate and the interest rate. Understanding the difference between the two rates is important and will help you make an informed decision when shopping for the right lender and the right loan.

Interest Rate

The interest rate is the yearly rate a lender charges for permitting the borrower to use money for a specific length of time. The rate is calculated by dividing the total amount of interest charged by the loan amount. For example, if a lender charges a client $60 a year on a loan of $1000, then the interest rate would be (60/1000) x 100% = 6%.

Annual Percentage Rate

The APR is a little more complex and is comprised of two factors: it includes your actual interest rate and any additional costs. Additional costs might include things like prepaid interest, private mortgage insurance or closing fees. Your APR represents the total cost of credit on a yearly basis after all charges are taken into consideration. It is typically higher than your actual interest rate, because it includes these additional items and assumes you will keep the loan for the full term.

When shopping for a mortgage – especially if it’s your first time -it’s important to understand the terminology surrounding the mortgage process. So do your research. Find out as much as you can so that you understand the loan process to make an educated and informed decision when it comes time to choose a loan and lender.

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This Post Has 3 Comments

  1. No Betsy on a standard 30 year fixed mortgage the interest is always calculated off of your original balance. There are loans that were around like the CODI and COSI loans which recalculate the interest off of your new balance in other words if you were to compare a fixed mortgage and a CODI loan side by side and make the same extra payments towards your principle balance you would end up paying less interest and pay your loan off faster with the CODI. Of course the CODI,COSI loans were adjustable.

  2. yes besty it does. But they add up all your principal and interest you pay during the length of loan and they devided monthly. So you wouls have a fixed monthly payment

  3. Is interest on a mortgage recalculated monthly so that as I pay the principle the interest will then be calculated on the remaining principle on a monthly basis?
    Betsy

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