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Demystifying Mortgage Rates: APR vs. Mortgage Note Rate

When it comes to securing a mortgage, the terms and numbers thrown around can be overwhelming. Two key figures that often cause confusion are the Annual Percentage Rate (APR) and the Mortgage Note Rate. While they might sound similar, these figures play different roles in your home loan. Let's delve into the differences between the two to help you make informed decisions.

Mortgage Note Rate:

The Mortgage Note Rate, also known as the "interest rate" or "contract rate," is the rate used to calculate the interest expense on the loan amount. It’s the percentage charged by the lender for borrowing the funds and determines your monthly mortgage payment. This rate is what lenders advertise and is a critical factor in determining your overall repayment amount.

Annual Percentage Rate (APR):

On the other hand, the Annual Percentage Rate (APR) encompasses not only the interest rate but also additional fees and costs associated with the loan. It reflects the total cost of borrowing over a year, expressed as a percentage. The APR considers charges such as closing costs, points, broker fees, and other finance charges, giving borrowers a more comprehensive view of the loan’s actual cost.

Key Differences:

  1. Inclusion of Fees: The primary contrast between the APR and Mortgage Note Rate lies in what they consider. While the Mortgage Note Rate focuses solely on the interest charged on the loan amount, the APR incorporates other costs associated with obtaining the mortgage.

  2. Representation of Total Cost: The Mortgage Note Rate provides a clear picture of the interest you'll pay, while the APR gives a broader perspective by factoring in additional fees and costs. This means that the APR is typically higher than the Mortgage Note Rate.

  3. Comparative Tool: While the Mortgage Note Rate is useful for comparing interest rates offered by different lenders, the APR serves as a better tool for comparing the overall cost of loans from various lenders since it includes additional fees.

Choosing Wisely:

When evaluating mortgage options, it's crucial to consider both the Mortgage Note Rate and the APR. A lower Mortgage Note Rate might appear attractive, but a higher APR could signal higher overall borrowing costs due to added fees. Assess your financial situation, loan duration, and preferences to make an informed decision.

Final Thoughts:

Understanding the distinction between the APR and Mortgage Note Rate empowers you to make informed choices when selecting a mortgage. While the Mortgage Note Rate is the baseline interest charged, the APR paints a comprehensive picture by factoring in associated fees. By considering both, you can navigate the mortgage landscape more confidently and select the option that best aligns with your financial goals.

Remember, consulting with mortgage professionals can further clarify these rates and help you choose the most suitable mortgage option for your specific needs.


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