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The APR (annual percentage rate) is the numerical representation of the total cost of a loan for a full year, including all fees associated with the loan and the monthly interest rate. The mortgage rate is the monthly rate charged to the principal balance of the loan.
Significance
The APR is calculated by a formula regulated by the U.S. government. All lenders must use the same calculation to compute the APR.
Function
The APR allows borrowers to accurately compare the total cost of the loan with another offer. The loan with the lowest APR is the cheapest overall loan.
Types
The monthly interest rate can be variable or fixed. The APR changes only if the fees associated with the loan change.
Time Frame
The APR associated with a mortgage covers the fees and interest rate charged to the borrower over the first year of the loan, which is the most expensive due to closing costs.
Considerations
While one bank may charge a borrower a lower monthly interest rate, the resulting APR may be higher due to increased fees associated with that lower interest rate.
Source:
BankRate.com: the Difference Between the Interest Rate and APR
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