When it comes to purchasing a home, you are going to hear a bunch of different terms that you may or may not be familiar with. Many first-time home buyers feel overwhelmed during the home buying process because there are just so many terms (and the fees they include) that are thrown around. At First Fidelis, we aim to make the home buying process as simple as possible—even for those who have never purchased a home before.
Two of the most commonly confused terms are APR and interest rate. Let’s take a look at these two terms.
APR, which stands for annual percentage rate, is a measure of the cost of the mortgage on your home. This cost includes the interest rate as well as other things such as the broker fees, closing closes, and discount points. APR is shown as a percentage. You should expect the APR rate to be higher than the interest rate since it includes the interest rate as well as other fees.
The costs included in your APR are determined by your lender. While you may talk to one lender who includes the appraisal fee in the APR, other lenders may not include that fee in the APR, and you would need to pay it separately.
The interest rate is the cost of taking out the principal loan amount. This rate can be either fixed or variable depending on the terms of the loan, but it is always expressed as a percentage. The interest rate is a cost that is added to your monthly payment to pay the lender for the loan.
Your mortgage payments will include the amount of money taken out in the loan as well as the interest. These interest rates can be handled in one of two ways. The first type of rate is fixed. Fixed rates never change. This means that you will always pay the percentage of interest that was agreed upon when you took out the loan.
Variable or adjustable rates can change based on the index. Loans with adjustable rates will have different monthly payments based on the interest rate at the time, but there is usually a limit to how much and how often the rate can change.
Interest rates vary based on the lender and the borrower. Some of the considerations for interest rates include:
- Amount borrowed
- Down payment
- Length of the loan
- Type of loan
- Location of the loan
- Past payment history
When it comes time to apply for a loan, it is important to know whether the rates are floating or locked. A floating rate can still change until closing. Locked rates stay the same for 30, 45, or 60 days, which gives many people enough time to find a home and close on it.
If you are still feeling uneasy about these terms, feel free to reach out to First Fidelis with any questions. As one of the top mortgage brokerages in the Kansas City Metro Area, our goal is to help potential homeowners understand the home buying process and make it as seamless as possible along the way.