Understanding APR

Man's hand holding credit card

By Tony Dankha, Mortgage Loan Officer

If you have a credit card or any type of loan, chances are you’ve heard the term “APR.” It’s important to know what those three letters stand for, and understanding APR will help you make better financial decisions for your future.

APR stands for Annual Percentage Rate, and it is an annualized representation of your interest rate. The lower an APR on a credit card, the less expensive your transactions will be over time.

In order to better understand how APR works, we should look at how it’s applied and how it’s calculated. Generally, credit card companies will grant a grace period for new purchases. You can buy a new TV, and if you pay off the full amount during your grace period window, you only pay the amount you owe without paying any interest. If you do not pay the full amount during the grace period window, however, you will have to pay interest on your unpaid balance.

That’s how APR is applied, but how is it calculated? This is a little more complicated and it varies. The APR is set by combining the US Prime Rate, which is published by the Wall Street Journal, and a margin that is charged by the financial institution. If your APR is variable, it will change based on the market. Some financial institutions do offer non-variable rates, so it’s important to know that information as well.

How does APR come into play when buying a home? Well, while the interest rate is the cost of borrowing the principal amount loan, the APR is the cost of the mortgage and it includes things like the interest rate in addition to broker fees, discount points, and some closing costs, which are expressed as a percentage. Both the APR and the interest rates are ways you, as a consumer, can shop around and determine which loans suit you best in terms of affordability. The interest rate depends on things like your credit score and the market rate. The APR is determined by the lender, and costs may vary. Your APR is disclosed in your loan agreement, and you should always look at that number to ensure you are getting a good deal from your lender.

Another factor to keep in mind when it comes to your home’s APR is how long you plan to stay in a home. If you have found your forever home and you will spend decades in this home, it makes sense to look for a low APR, so that you can pay the least amount possible to finance your home. Conversely, if you only foresee yourself staying in a home for a few years, it makes sense to pay fewer upfront fees and a higher APR because the total cost will end up being less over the course of the first few years.

Questions? Our team is here to assist you. Contact us today!