What is the Difference Between Interest Rate and APR, and How to Calculate Monthly Interest

Interest rate vs APR

If you’ve been pre-approved for a mortgage, you probably noticed two different interest rates on your loan estimate: interest rate and APR. You also probably noticed that your APR is higher than your interest rate. If you’re confused about the difference between these two, I’ll break it down for you!

Your interest rate is simply the cost to borrow money. It is the amount that you pay every year to your lender/bank to borrow money.

However, getting a mortgage is actually more expensive than that. APR, or annual percentage rate, includes your interest rate along with any other fees or expenses that come along with getting that loan, such as mortgage insurance, closing costs, mortgage origination fees, and discount points.

So what is the point of including both rates? APR gives you a more accurate representation of what you will actually be paying to borrow that money.

How to Calculate Interest

Interest is paid in arrears, which means after it's accrued, not before. To find out how much you pay in interest every month, you first need to figure out your remaining principal balance. Lets say your remaining loan balance is $100,000, and you have a 4% interest rate. The math is as follows:

$100,000 x 0.04 = $4000 / year

$4000 / 12 months = $333.33 / month

So you would be paying $333.33 in interest that month.

If you’re interested to know today’s rates, or if you’re ready to get pre-approved for a mortgage, please contact me! I would be happy to connect you with local lenders that I know and trust.

--

Olivia Cook Realtor® (904) 874-0009 Keller Williams Atlantic Partners @oliviacook_realtor olivia.cook@kw.com