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The information on this site does not modify any insurance policy terms in any way. Both percentages help you understand the cost of a mortgage, but they are not the same thing.
APR stands for annual percentage rate, and it represents the cost of your mortgage by including the interest rate and some other fees and closing costs. For example, if you have to pay an origination fee or points , those expenses would be included in the APR. With a fixed-rate mortgage , the rate never changes for the duration of the loan e. The rate on an adjustable-rate mortgage ARM can change at certain intervals based on market conditions.
The lender advertises an interest rate of 3. Those extra costs make the APR 3. Determining the APR involves three key figures: the interest rate, fees and any points you choose to pay upfront. Interest rates are partially determined by factors that are completely out of your control, such as inflation, the ups and downs of the broader economy and the lender you choose to work with.
Because of these factors, mortgages rates are constantly changing. You might see a rate of 3. This is why mortgage rate locks can be a valuable tool.
Why do they always seem to display an APR lower than the mortgage interest rate? So the remaining portion of the year amortization period must be estimated at origination, based on the current mortgage index plus the margin, which varies by bank or lender. The result would be a lower APR over the life of the loan, factoring in the expected interest rate decrease, despite the fact that the associated mortgage index could in fact increase during the fixed period.
While low APRs may be a common occurrence while interest rates are low, quite the opposite can happen once rates and mortgage indexes begin to creep higher. Using our same logic from above, but taking a fully-indexed rate that is higher after those first five years, you can see why the APR would actually be higher than the rate, which is more the norm on all types of home loans.
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