Interest rate vs APR what’s the difference - YouTube

Hi it's Martin here with Wintrust Mortgage. Hope you're having a great day. I want to

take a moment here to talk to you about a concept that can often be very

confusing to to our home buyers and it may sound real simple but it's not.

And that is interest. Specifically what is an interest rate and what is APR? How are

they the same? How are they different? Really what's the meaning behind this?

Okay so let me try to break it down in a simple way and give you some guidance on

how you might want to look at this particularly if you're trying to compare

a couple different loan options. Interest on a loan, okay, by definition is

basically the fee the bank is charging for you to be able to use their money

okay so if you have a $400,000 loan you put in the interest rate of say 4

percent or 3 percent whatever it is they're offering, amortize that over a

period of time and it gives you a monthly payment. The interest rate is

what drives your monthly payment month in and month out. It's a very important

number and you always want to know what that number is. Okay now where it gets

confusing and complicated is when we start looking at the term of APR now by

definition that means annual percentage rate and the idea behind APR is to be

able to analyze the full cost of that loan taking that interest rate plus all

the fees and all the transactional costs that go into what it takes to get that

loan so in other words how much money you need to put in or what do you need

to give the bank in order to get that loan issued back to you and in many

cases the idea behind APR was designed so that borrowers can compare different

loans that may not always be apples to apples so for example let's say your

lender is offering you a an interest rate of say 4 percent with 0 points and

zero costs. But then somebody else is offering you a 3.75 which is a lower

interest rate, but they're going to charge you some fees. Well where are you

better off? Okay that was the concept that was the idea behind APR but the

problem is APR has some inherent flaws in the way the numbers are calculated and

the way the world really turns and for that reason I'm going to tell you I

don't really pay a whole lot of attention to APR I'm not gonna tell you to fully

ignore it but I will tell you to take it with a grain of salt

look at it and unless you're really good with numbers you're probably not going

to figure this out because here's first flaw with APR. Let's assume you have some

fees in your loan which most people will have some number of fees, APR will

calculate that in okay let's say that the interest rate is 4% you have an APR

that's some weird number like a 4.23 all right that .23

is being made up of all these extra fees that are having to be paid by

you the borrower but what if you have some kind of a concession being offered

to you? The APR does not allow for a credit from say the seller to the buyer

which is very common so let's say your realtor negotiates a deal where you're

getting five thousand dollars in the form of a credit from the seller the APR

does not deduct that out see because the the APR just doesn't have the ability to

to factor that in so now your APR is showing this higher interest rate but

you're not the really the one paying it somebody else is paying it and that

somebody else doesn't have to be the seller could be a realtor with some kind

of Realtors fees that they're crediting you or something like that so there's a

lot of different things that APR doesn't take into consideration but the biggest

problem with APR is that it makes the assumption that the fees that went into

the loan are being amortized over the the maturity date or the length of that

loan. So in most mortgage applications that's a 30-year loan; how often is a

customer really in the full duration of a 30-year loan? Very few people get to

the end of 30 years and pay off that mortgage most people will either

refinance the property somewhere in the five to seven year range or they will

sell a property because they're moving up or moving down. Yes there are some

people that do see the full 30 years of a loan, but that's the rarity. And the

problem with that is if you have an APR that's calculated to say, using my

original example of 4.23%, and you paid off that loan fifteen years

into it now that cost was compressed and there's fifteen years of interest that

you didn't have to pay and that is not reflected in the APR that you're

evaluating at the time of origination with a loan. So that's where we start

getting into that confusion with APR so here's the way

like to address this with most borrowers. Look use APR as a rough guideline it's a

number you're gonna look at, but we're not going to get into completely

breaking that down. What we want to look at is your monthly payment because at

the end of the day your mortgage has to fit your budget and what you should be

looking at is the dollars. Am I paying something to get a lower interest rate?

Okay that's something we need to look at, what's your break-even point? If I'm

giving up $3,000 to get a lower interest rate how long will it take for me to win

back that $3,000 through the savings I'm getting through that lower rate so

that's something I would look at the other thing I would look at is making

sure that the monthly payment is something that you're comfortable with

because at the end of the day regardless of what interest rate or APR you get if

the payment doesn't fit your budget you probably shouldn't be doing it

so that's just a very quick overview on on interest rates and APR I hope you

find that to be helpful you know as always I'm happy to assist you if you

need to do any kind of comparisons or have any questions about anything we can

help you in that regard please comment down below reach out to me or call

either way I'm happy to help and just don't let the don't let the paperwork

confuse you that's what we're here for is help demystify some of this for you

Have a great day - Thank you