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| *The Commerce Journal>>>Renting & Real Estate |
What is the difference between an interest rate and a purchase APR when obtaining a mortgage? |
What is the difference between an interest rate and a purchase APR when obtaining a mortgage? The "interest rate" sets the amount of your periodic (usually monthly) payments if you received the full dollar amount of the loan at closing. But you don't. Certain charges are deducted from the loan amount at closing, thereby raising the effective interest rate. This is termed the Annual Percentage Rate. For instance: $1,000.00 loan at 12% interest rate payable monthly = $10.00 a month interest. $1,000.00 at 12% minus $100. 00 in up front points = $900.00 actually received tho' the note is still for $1,000.00. $10.00 a month is now an APR of 13.3% tho' the note "reads" 12%. APR is a tool to illustrate how much it cost to obtain financing at the time you close on the loan. It expresses how much you paid to get into the loan as though the payment would be that high every month, even though it is only a one time cost. |
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