When you're looking for a home loan or a mortgage, it's important that you fully understand the terms of the loan agreement you're signing up for – including the mortgage rates. The two interest rates you'll come across most often are the annual percentage rate (APR) and annual percentage yield (APY).
Although APR and APY sound similar, they're quite different, and you should know how they affect your home loan repayments before you commit to your loan agreement. Below, we go over the key differences between APR and APY and what impact they have on the long-term cost of your loan.
The APR is the yearly interest rate you pay on any loan, including home loans and mortgages. Essentially, it's the annual cost of your mortgage, and it includes some lender fees. The exact fees included in the APR vary by lender, and it's the lender who is responsible for setting the interest rate.
APY is a little more complicated because it's the sum of various figures. Basically, APY is the sum of:
• Your yearly interest rate
• Compound interest – a premium on borrowing charged against the principal sum and the accrued interest
• The rate at which your loan compounds, whether it's weekly, monthly, quarterly, or yearly
With all these sums involved, it's not uncommon for the APY rate to cost you more than the APR itself. That's why it's so important to understand exactly how APR and APY affect your home loan repayments, and how to source the best deal.
The answer to this is simply no, it's not. For example, you might see refinance mortgage rates advertised with 3 percent APR but with a 6 percent APY. Depending on how often the loan compounds, and the total of your accrued interest, you could end up paying more than, say, someone who takes out a 5 percent APR mortgage with a 3 percent APY.
The bottom line is that you should never simply take the lowest loan rate advertised – it's all about shopping around and doing your research. Here are some factors to consider before you sign any mortgage agreement.
The interest rate is simply what the lender charges for lending you money. The APR includes fees, such as administrative and bank fees. Clarify exactly what your APR covers before you agree to it.
How long you plan on having the home matters. Some loans are better suited to long-term borrowers, whereas others offer better rates for short-term lending. It's a good idea to shop around – check out a mortgage calculator and compare mortgage rates today to see what loan duration and interest rate works for you.
Although looking for a new home is exciting, it's a huge commitment, and you should take your time looking for the right finance agreement before you sign anything. Contact Us for more information.
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