What Does APR Stand for and How to Use it to Your Advantage

Two well-known values reflect the cost of a mortgage – the interest rate and the Annual Percentage Rate, aka APR. The most common questions that come to mind when we hear about these terms are: “What does APR stand for?” “What are the additional costs I will have to pay?”

If you decide to get a loan — the last thing you want is to pay even more than you already agreed to. 

While these values, interest, and APR are a cause of additional fees, they differ. Let us dig a little deeper now. 

What do these terms mean? What does APR stand for? 

The interest rate is the price that you have to pay for borrowing a certain amount of money. One of the main factors that go into quoting your annual percentage is your credit quality.

The APR includes a broad range of annual expenses: prepaid interest and other charges such as closing agent’s document preparation charges, attorney charges, origination charges, etc. 

This figure is not defined by the tendency in the market and the credit history but by the will of the moneylender. It is made up of moneylender charges that differ from loaner to loaner. 

Legally, lenders are obliged to write down a nominal APR in any contract entered into with consumers. However, you should note that a moneylender may not list all required changes in the contract, such as credit reports or inspection charges.

Always make sure that you’re fully informed about all required charges before you sign the agreement. Even if it takes asking the lender, “Is it all, I have to pay or I should know about something else?” ten times in a row. 

So, how do these rates distinguish from each other?

To put it simply, consider the interest rate as a value that affects the number of your regular payments and the annual percentage as a broader perspective, the value that affects the total amount of the loan.

You should check these two values carefully, as even small changes in rates can significantly affect the total size of your loan.

How long is it better to borrow?

Now that you know the meaning of these terms, you can look closely at the calculations. 

Let’s imagine that you want to buy a new home. You intend to live in this house all your life and then leave it to your heirs. 

It would be best to take out a home loan with as low an annual percentage rate as possible if you are up to using your property for many years ahead. If the repayment period is long, you will pay less with a low borrowing percentage.

On the contrary, if you do not intend to live in the house for years, it is better to make a lower initial contribution and choose a higher percentage rate as the cost would be lower in the first couple of years.

Remember that if you intend to live in your residence for only a couple of years and plan to purchase some mortgage points striving to buy down the rate, you should do careful math to define your break-even position.  

Unfortunately, these calculations may seem difficult to a person who is not well versed in financial knowledge. Remember, it would always be a good idea to consult a financial advisor to ensure changes, you do not make a mistake.

The best way to compare the available mortgage offers

Your decision on a mortgage type may depend on several factors. When comparing available mortgage offers, follow these steps:

  1. Find out about the interest rate and APR. They are among the most important factors to consider, as they affect the total amount you will have to give to pay off the credit.
  2. Pay attention to other factors such as credit score, initial contributions, or minimum reserves. You cannot compare mortgage types considering the figures mentioned above alone.
  3. Work on your credit history. Since your credit score affects the number of fees you must pay annually; you should consider this factor and work on your credit history in advance.
  4. Get credit quotes from numerous lenders. Remember that you should do this within forty-five days because the credit check trail will negatively affect your credit file if this period expires.

When the lender checks your credit report to decide whether you are a risk worth taking, the check trail remains on your credit history. The advantage to you is that multiple inquiries for this type of report from numerous lenders in the first weeks count as one inquiry under the current rules. So in the first few weeks, you can contact as many lenders as you like.

Another piece of advice: Bankrate publishes materials describing the latest mortgage rates from various moneylenders, broken down by borrowing rate and APR. The published materials also highlight costs and estimated required monthly payments.

What does APR stand for: Final thoughts

Additional costs always seem to be an irrefutable argument when you want to take out a mortgage. The interest rate and APR are among the most important factors you should consider, as they will affect the total amount you will have to pay to repay the mortgage. If you are unsure about interest rates, you should remember that it would always be a good idea to consult a financial advisor to make sure you do not mistake. 

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