Dear first time home buyers,

I know those terms can confuse a lot of consumers. I’m here to make it as simple as possible for you to understand the differences between the two.

Interest rate is the percentage you pay to borrow money from a lender for a specific period of time and it might be fixed, meaning it stays the same throughout the duration of your loan.  You pay interest monthly on the principal. (Principal=the amount due and owed to satisfy the payoff). If you pay more than scheduled, on the principal amount every month, your interest amount that you pay throughout the loan will be reduced.

APR, annual percentage rate, is a measure of the cost of credit, expressed as a nominal yearly rate. APR includes your interest rate, additional fees and expenses associated with taking out your loan, such as any prepaid interest, private mortgage insurance, some closing costs, mortgage points and other fees you may need to pay.

The lender must tell you both your interest rate and your APR. It will be given to you in a form called loan estimate, no longer than 3 days after you submit a loan application,(then you have an option to compare or shop for different loans), and also at least 3 business days before the loan closes, in a form called closing disclosure, to make sure you understand all of the costs of the transaction.

Hope this information was helpful.