Difference Between Mortgage APR vs Interest Rate
The following article provides differences between Mortgage APR vs Interest Rate. The mortgage annual percentage rate is a charge required for the total loan amount and contains interest as well as all other expenses required for the loan procedure. An expense like mortgage broker fees, any points, interest rate, and any other charges. On the other hand, the interest rate contains only interest charges on that loan amount. The annual percentage rate is calculated by the combination of interest rate and other expenses or fees required for the process.
The annual percentage rate is mostly higher than the nominal interest rate because it considers all other fees. The annual percentage rate takes only simple interest while calculating the final rate, but there is another term called annual percentage yield it takes to compound interest in calculating rate; this is called the effective annual rate.
What is Mortgage Annual Percentage Rate?
The annual percentage rate is the annual rate required for the overall loan process. It contains not only interest rates but also all expenses, including fees or additional costs, brokerage fees, etc. APR is expressed as a percentage and calculated yearly. It gives you a calculated amount that you need to pay per period without compounding of interest. The annual percentage rate is calculated by multiplying the simple interest rate by the number of periods in a year. It is a charge earned on an investment. APR is of two types one be fixed, and another is variable. Fixed APR is guaranteed not to change the whole life of the loan, but in variable APR, the interest rate may change during the life of the loan.
What is the Nominal Interest Rate?
The nominal interest rate is the only interest charge on loan, and it does not contain any other expense. It is the rate on the loan that has to pay by the borrower from where they take a loan, and it is also expressed as a percentage. If interest rates are reduced, then people take more loans for their business or any other investment. And an increase in interest rates makes borrowers discourage investing. The interest rate can be calculated for less than one year or more than one year as well. The interest rate can vary widely. For calculating the yearly interest, you have to multiply the annual percentage rate by12.
Head to Head Comparison between Mortgage APR vs Interest Rate (Infographics)
Below are the top 7 differences between Mortgage APR vs Interest Rate:
Key Differences between Mortgage APR vs Interest Rate
Let us discuss some of the major key differences between Mortgage APR vs Interest Rate.
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- The nominal interest rate gives you a monthly payment amount, whereas the mortgage annual percentage rate gives you a total estimate of the overall loan process’s cost.
- The mortgage annual percentage rate is a great term that shows you an amount for every monthly payment as well as the total cost of expenses, but the nominal interest rate shows only interest.
- For the calculation of mortgage annual percentage rate, you required total, or additional fees, nominal interest rate, principal amount and number of days in the loan term. And the nominal interest rate is calculated without the inflation rate and did not consider any additional fees or any other charges.
- As compared to the nominal interest rate mortgage annual percentage rate gives you a realistic value. The nominal interest rate does not provide a clear amount; it gives us a short term view of the loan amount.
- The mortgage annual percentage rate always helps us to select what is more affordable from a long-term perspective.
- It is not necessary that if the annual percentage rate is low, then this is a better deal.
- APR may vary because all expenses may vary, such as brokerage is not the same everywhere. And the nominal interest rate is also not constant because the nominal interest rate is nothing but an addition of real interest rate and inflation.
- The mortgage annual percentage rate is calculated by using only a simple interest rate.
- The mortgage annual percentage rate is usually higher than the nominal interest rate because it considers all the expenses additional fees.
Mortgage APR vs Interest Rate Comparison table
Let’s discuss the top comparison between Mortgage APR vs Interest Rate:
Basis of Comparison |
Mortgage APR |
Interest Rate |
Definition | APR is the annual rate required for the overall loan process. | The nominal interest rate is the only interest charge on loan. |
What does it Include? | Finance charges such as broker fees, discount points, additional cost. | It is the rate at which the borrower takes money from the lender. |
Rate | Higher compared to the interest rate. | Lower than the annual percentage rate. |
Cost | The annual percentage rate is the true and total cost of the loan. | The interest rate is the only cost of interest in the monthly payment. |
How to Calculate? | The annual percentage rate is calculated by multiplying the periodic interest rate by the number of periods in a year. | The nominal interest rate is calculated without considering the inflation rate. |
Formula | APR = (((fees + interest) / principal*n) *365) *100
Where, n = number of days in loan term. |
r = m * [(1+i)^{1/m }-1]
where, r = nominal interest rate i = the effective rate m = number of compounding periods. |
Measurement Unit | The mortgage annual percentage rate is measured in percentage. | The nominal interest rate is measured in percentages. |
Conclusion
We have gone through major differences between mortgage annual percentage rate and nominal interest rate. So which is better termed to get a clear idea and clear view while taking a loan? The mortgage annual percentage rate is better than the nominal interest rate because the annual percentage rate gives us a clear view of the total cost required; thus, it calculates by adding all the additional fees and interest required for the loan. The mortgage annual percentage rate gives us a value that is useful for deciding for the long-term; it also shows that this will be affordable to us. But the annual percentage rate may vary because the fee structure is not the same everywhere and every time. The value of the mortgage annual percentage rate is mostly higher than the nominal interest rate because of additional fees. The mortgage annual percentage rate is calculated by using a simple interest rate. The mortgage annual interest rate gives us a true amount, but the nominal interest rate doesn’t give it only shows a monthly payment. So for taking the final decision, you must go through the mortgage, annual percentage rate.
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