City-Data Forum The difference between APR and interest rate? (Moved from Houston, TX forum) (home loan, 30 year fixed)
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08-19-2008, 01:33 PM
 792 posts, read 3,825,048 times Reputation: 650

The difference between APR and interest rate? Hi,

My good faith estimate states that my interest rate in around 6.625 % and my estimated APR is around 7.389%....

When looking at home loans what comes to play? The interest rate or APR?

08-19-2008, 01:51 PM
 Location: Houston 1,458 posts, read 4,915,467 times Reputation: 422
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.

08-19-2008, 02:07 PM
 Location: Houston 57 posts, read 379,161 times Reputation: 31
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.

08-19-2008, 02:11 PM
 792 posts, read 3,825,048 times Reputation: 650
Esimated Interest Rate is 6.6 and the APR is 7.38.

Does that mean we pay 6.6% interest or 7.38 interest.

08-19-2008, 02:20 PM
 58 posts, read 182,543 times Reputation: 19
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

08-19-2008, 02:24 PM
 Location: Houston 57 posts, read 379,161 times Reputation: 31
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.

08-19-2008, 02:25 PM
 792 posts, read 3,825,048 times Reputation: 650
Hi tjoseph,

>> 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%.

08-19-2008, 02:30 PM
 Location: Houston 57 posts, read 379,161 times Reputation: 31
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.

08-19-2008, 02:38 PM
 792 posts, read 3,825,048 times Reputation: 650
Here is the information:

Estimated Interest Rate: 6.625% (7.389% Estimated APR)
Conventional - 30 YEAR FIXED

So the above means that I will be paying 7.38% annual interest on my 179K loan.

For first time home buyer I think that is very high.

08-19-2008, 02:40 PM
 Location: Pittsburgh N. Hills / Houston-Clear Lake 8,156 posts, read 26,420,381 times Reputation: 4395
Yeah it is a little high, I think.

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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