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interest rate vs. APR

Posted on 2013-05-15
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I wanted to know what the difference is between interest rate vs. APR?  More within a mortgage environment.
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Question by:uppercut7141
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by:d-glitch
ID: 39168906
The APR refers to the Annual Percentage Rate.

Interest rate is more generic.

If your interest rate is 1% per month, your APR will be more than 12% per year because of compounding.

If you pay points on a mortgage to get a lower interest rate, your APR will be higher because the points cost and other fees will be amortized over the life of the loan.

APR tries to give you a standard way to compare the costs of borrowing for different types of loans with all sorts of gimmicks.

   http://en.wikipedia.org/wiki/Annual_percentage_rate

Note that there will be a legal definition for the effective APR in your jurisdiction.
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TommySzalapski earned 500 total points
ID: 39168953
Also of note is the APY and the GFE.
APY is the Annual Percentage Yeild which is how much the interest really comes to over a year.
For example, if you are charged 12% APR but it compounds at 1% each month, then you really end up paying about 12.68% interest at the end of the year (since the interest each month includes what was added last month).

GFE is the Good Faith Estimate where the lender gives you a number that is their best guess at the total cost of the loan over the agreed upon period. To me, that is the most important number since it's the true cost of the loan. Of course you can calculate that yourself based on the other input, but they are required to give it to you in many places.
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