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The APR formula combines a loan’s interest costs with other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage. The APR is therefore a better reflection of the true cost of borrowing than interest rates alone. The interest rate is the percentage of the loan amount that the bank is charging you to borrow money.
6.625%....loan amount interest only.
7.389%....with all fees included.
The "Interest Rate" is used to make the calculations by the bank. The APR is an attempt to standardize an interest rate to allow you to compare loans with different terms. It takes into account differences in compounding, as well as any additional costs. It is the "Effective Rate" of the loan. IMO, it is the best way to compare loans across lenders.
You will get a loan offer from a bank that says X payments of $Y plus Z origination costs, etc. If there's anything in that you don't understand, keep asking questions until you do understand.
Your monthly payment which is principal and interest is calculated off of your interest rate of 6.625%. The APR is not your note rate, that is the 6.625%. The APR is the amount that you are financing (loan amount ) plus certain closing costs that you will pay at closing (such as prepaid interest, origination fees, etc) these two amounts are combined and spread over the life of the loan which results in a rate higher than the interest rate...giving you the APR of 7.38
The statement "you pay 6%" is not as precise as you might think. Two lenders might truthfully say that, but they have different compounding rates and roll in different fees.
The APR is the "standardized" rate that allows you to compare. At least that's the goal.
In your case, the bank has programmed 6.6% into their computer to run the math. You will end up paying 7.38%.
I know it's weird. The math can get complex. I would tend to compare the APR across lenders.
>> these two amounts are combined and spread over the life of the loan which >>results in a rate higher than the interest rate...giving you the APR of 7.38
Not sure I understand the above statement. Can you please elaborate on this more?
So APR 7.38% is the amount calculated after the closing cost and other expenses but we pay the interest rate of 6.6%.
suppose one bank offers you 6.6 % with a $1000 origination fee. Suppose a second bank offers you 6.6% with a $2000 fee. Which has the lower interest rate?
They have the same "nominal rate" which is 6.6%. But the second loan is more expensive for you. The APR is an attempt to standardize that into one number that reflects the actual cost to you.
My first time buyer rate was 5.75% on the same loan amount, but it was back in 2005. No strings attached to that rate.
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