The difference between interest rate and APR

December 8, 2006 | Mortgage | 3 comments

When obtaining a loan why is the annual percentage rate (APR) different than the interest rate I was quoted? APR accounts for all costs associated with the loan and determines how the interest rate is affected by including them in the figures.

For example:

$100,000 loan @ 5% interest only = $5000 per year

$100,000 loan - $4000 costs = $96000

In the above calculations $96,000 is net proceeds after costs yet interest on the loan is still $5000. If you divide the $5000 interest by the net loan proceeds you will get the APR of 5.21%. The APR shows actual interest paid after including closing costs.

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What you don’t know about credit card fees can kill you on December 15, 2006 at 8:22 am

[...] When applying for a credit card there are several things to consider. The annual percentage rate (APR) is an obvious consideration, but fees can be astronomical with some cards and should be given some serious review. [...]

Monica on March 31, 2007 at 9:02 pm

Hi Tom.

I’m looking to buy a piece of property in Peru and I’m considering taking a HELOC. I have a great FICO and exceptional equity on my home. The broker I’m dealing with states that I can pay for the condo and turn around and convert the HELOC into a fixed second. How does this sound to you? Also, once the place is found I will have to draw 70% of the loan to pay off the property. Does this sound OK to you? Any other options?

Help please…

Thanks!

Monica

Tom Voli on April 2, 2007 at 7:14 am

A HELOC is a decent solution as it provides you the flexibility of taking what you need while only paying interest on what you have taken. As to whether or not converting it to a fixed rate second is a wise solution that would depend on your needs for the future and your ability to payoff the second. If you can payoff the HELOC in a reasonably short time I suggest staying with the HELOC because your payment will drop as you pay it off…unlike the fixed rate second. However, if the solution requires a long term payoff the fixed rate second can provide more rate stability.

Drawing 70% to payoff the property is acceptable, if you can afford the payment (which is the determining factor of whether or not you can afford the property). If this makes you financially uncomfortable you should re-think the purchase.