# Interest Rates vs. APRs Points

Let’s cover interest-rate verses APR’s

and what points are. The interest rate determines what the

lender charges you to borrow money. The APR or annual percentage rate is,

to put it simply, the interest rate plus charges and expenses that make up a true

cost of financing. Including points, origination fee, processing fees, interest,

and mortgage insurance. Points are fees paid up front to the

lender to lower the interest rates and therefore your monthly payment. The APR is a helpful tool for

comparing multiple loan offers with varying costs. Let’s look at a couple. These interest rates are exactly the

same but the APR’s are different. Why? Each loan comes with different fees and

when you factor these in over the life of the loan you get the APR. Sometimes the interest rate will be

higher than the others, but the APR are lower. That means the up-front costs are

actually lower. However, the one with the lower rate actually has a higher APR which

means your ultimately pay more over the course of the loan. The APR does have it’s shortcomings as

a method of comparison. Remember the APR spreads those front-loaded

costs over the life of the loan and there’s a good change you’ll move or refinance your loan well before the

long term ends. If that happens your costs are spread

out over a shorter time period changing your actual APR. Here’s an example, let’s say you

refinance or sell after five years. If you chose long 1 then you’re actual

APR changes to 4.407% because those upfront costs are now spread out across 5 years not 30. Compare that to loan 2 which had the

same rate and a higher APR. On that loan the true APR is 5%

if sold or refinanced after 5 years. But loan 3’s APR is still 3.75 because there were no costs. Overall the highest rate loan over 5 years, actually was more affordable. There’s one more spice to add to the mix. Points. Which as mentioned earlier, are

fees paid upfront to lower your interest rate. The cost of each point is 1% of

your loan amount. For example, on $100,000, one point would be $1,000. The amount the interest rate goes down

by point, varies from lender to lender. You should expect a range from .125% to .25% on a 30-year fixed. In general, points make sense the longer

you plan to stay in your home. Think of it this way if paying $1,000 in

points up front would save you $250 a year in mortgage payments Then it will take four years to break

even. And you’ll save $250 a year every year after that. As you shop for lenders know that the

rate reduction you get per point is completely negotiable. And fees associated with points are

considered a cost so they factor into the APR calculations. So that was a lot. Let’s sum it all up. As you shop for a loan

make sure to consider the interest rate, the APR, which includes the total cost

including fees and points, as well as the time you plan to be in

your home. Now go ahead and test out your new found

wisdom. You can easily compare rates, APR’s,

monthly payments, and lenders’ various fees at lendingtree.com.

Nice presentation.

I didn't understand why the example "Loan 3" with 0 points and 0 fees had total loan cost of $1800. (I assume that total loan cost means total upfront fees paid to lender).

how did you get 4.407% for the first loan if it was over a period of 5 years instead?

So helpful!!!

why does loan 3 has a cost of 1800? should't it be $0?

great explanation, thanks

Outstanding video thank you so much

Conceptually and visually the video is great, but your APR calculations are not correct in a few cases. For people trying to follow along using a financial calculator you'd be better off using the correct numbers. Admittedly, your video doesn't actually show HOW to calculate the APR for the shorter loans, but there are other source that do, and your numbers should be consistent with standard methods.