The difference between APR and Interest Rate


hey guys and welcome back to another

money tooth Monday today we're gonna be

talking about the difference between an

annual percentage rate and an interest

rate it's kind of a hot topic and

something that honestly I get calls

about all the time because it's

confusing whenever you're getting a home

loan what you're paying and interest

versus what you're paying overall and

that's really essentially the difference

between the two we're really going to be

doing a deep dive in this video to

debunk some of the misconceptions and

before we get into that though I am

gonna ask you a huge favor it means a

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into today's video I think we first have

to start off with basic definitions on

on an interest rate and then what an APR

is so interest rates are the rate that

you pay back alona right so let's say

you borrow a hundred thousand and the

bank is charging you five percent five

percent is the interest that you would

pay on a hundred thousand now depending

on how long that term is or how much

that loan cost you to get right those

things are all included in what's called

an APR right and that is the actual cost

of getting said home loan or said

financing for a term of X number of

years now what's really important about

the two things is that interest rate

just talks about interest and APR is

talking about total cost and you will

hear many financial people talk about

why it's so important to pay attention

to the APR but many times consumers get

confused with because these rates are

literally on most of the same documents

what are you actually paying on your

principal so interest has a direct

impact on your monthly payments right

where APRs typically include one-time

fees that are associated with getting a

loan right um but they sometimes include

things like mortgages

that's right and mortgage insurance

doesn't stay on typically for the life

of the loan unless you have certain

financings things that can be included

in an APR that will have a big impact

it's all of your processing fees all

your underwriting fees it's the cost of

title the cost of buying down your

interest rate right what it costs you to

get insurance and home loans that would

be mortgage insurance right so what does

it actually cost you to get financing


some people get confused because there

are those fees associated with acquiring

the asset so in real estate that would

be property tax or homeowners insurance

and those things are not included in

finance charges because they have

nothing to do with the home loan itself

right it has to do with acquiring the

real estate property it's very similar

in all other things if it's about

acquiring an asset it won't typically be

included in the annual percentage rates

things that can impact interest rates

are whether or not something is fixed or

not right and it's a whole lot easier I

will tell you to calculate an APR on a

fixed rate whatever versus a variable

because variable rate mortgages will go

up depending on whatever index they're

attached to okay so when you think of

interest you think of your monthly

payments when you think of APR think of

total costs now for me I always think

that the best course of action is to get

an itemization of what you're paying to

get said financing so that you really

have a comprehensive overview of what

you're paying and it's also very

important to note that these finance

charges are included in your APR

regardless of whether or not their paid

outside your closing whether they're

paid by the seller whether they're paid

by your lender or your real estate agent

these APR items do not change because

they're the same regardless of who pays

for them so just know that an APR may

always be the accurate picture of what

you pay just an accurate picture of what

it costs to get said look so I hope

today was very valuable on explaining

the differences between interest rates

and APRs it can definitely be

using and I'm happy personally to go

over any loan documents and answer your

questions just go ahead and hit me up

below at all of our contact information

and I'll be happy to respond so I hope

you guys have an awesome rest of your

week and stay tuned for another money to

fun day