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APR vs Interest Rate: Understanding the Difference

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

When you’re shopping for a loan, don’t let your research end with a comparison of lenders’ interest rates. While a low interest rate is appealing, it’s important to also look at each loan’s annual percentage rate (APR), which will provide a clearer picture of how much the loan will cost you when fees and other costs are factored in.

APR vs Interest Rate: Understanding the differences

The difference between APR and interest rate is that APR will give borrowers a truer picture of how much the loan will cost them. While APR is expressed as an interest rate, it is not related to the monthly payment, which is calculated using only the interest rate. Instead, APR reflects the interest rate along with fees and other one-time costs a borrower will pay for a loan.

“You can find a mortgage that has a 4-percent interest rate, but with a bunch of fees, that APR may be 4.6 or 4.7 percent,” said Todd Nelson, senior vice president-business development officer with online lender Lightstream. “With all of those fees baked in, they are going to swing the interest rate.”

For example, one lender may charge no fees, so the loan’s APR and interest rate are the same. The second lender may charge a 5 percent origination fee, which will increase the APR on that loan.

How the APR is calculated

Lenders calculate APR by adding fees and costs to the loan’s interest rate and creating a new price for the loan. Here’s an example that shows how APR is calculated using LendingTree’s loan calculator.

A lender approves a $100,000 at a 4.5 percent interest rate. The borrower decides to buy one point, a fee paid to the lender in exchange for a reduced rate, for $1,000. The loan also includes $900 in fees.

With these fees and costs added to the loan, the adjusted balance being borrowed is $101,900. The monthly payment is then $516.31 with the 4.5 percent interest rate, compared with $506.69 if the balance had remained at $100,000.

To find the APR, the lender returns to the original loan amount of $100,000 and calculates the interest rate that would create a monthly payment of $516.31. In this example, that APR would be 4.661 percent.

APRs will vary from lender to lender because different lenders charge different fees. Some may offer competitive interest rates but then tack on expensive fees and costs. Lenders with the same interest rate and APR are not charging any fees on that loan, and lenders that offer APR and interest rates that are the closest will charge the least-substantial amount of fees and extra costs.

What can impact my APR?

While APR will change as interest rates fluctuate, lenders’ fees and costs will have the greatest impact on APR. Here are some of the fees that will affect the APR.

Discount points: Buying points to lower a loan’s interest rate can have a significant impact on APR. Lenders allow buyers to purchase “points” in return for a lower interest rate. A point is equal to one percent of the mortgage loan amount. For example, a buyer approved for a $100,000 loan could buy three points, at $1,000 each, to lower the interest rate from 4.5 to 4.15.

Loan origination fees: Loan origination fees typically range between 1 and 6 percent, according to Nelson. This can be especially significant for larger loans.

Loan processing: This fee, which some lenders will negotiate, pays for the cost of processing a mortgage application.

Underwriting: These fees cover an underwriter’s review of a loan application, including the borrower’s income, credit history, assets and liabilities, and property appraisal, to determine whether the lender should approve the loan application and what terms should be applied to the loan.

Appraisal review: Some lenders pay an outside reviewer to make sure an appraisal meets underwriting standards and that the appraiser has submitted an accurate report of the home’s value.

Document drawing: Lenders often charge a fee for creating mortgage documents for a loan.

Commonly not included in APR are notary fees, credit report costs, title insurance and escrow services, the appraisal, home inspection, attorney fees, document preparation and recording fees.

Because APR includes a loan’s interest rate, rising interest rates will increase APR for mortgages, auto loans and other types of loans and credit.

Interest rate vs APR: What should I focus on when shopping for a mortgage?

While lenders often push their low interest rates when they advertise loans, Nelson said it’s vital that consumers check loans’ APR when shopping around and pay attention to how loan advertisements are worded.

“Look for a lender that’s transparent about disclosing all of those fees,” he said. Lenders may advertise “no hidden fees,” he said, but that might mean there are other fees that simply aren’t hidden.

Here’s how two loans for the same amount can have different APRs.

Loan amount

Fees and costs

Fixed interest rate

APR

$200,000

$1,700

4.5%

4.572%

$200,000

$2,600

4.5%

4.61%

The Truth in Lending Act requires lenders to disclose APR in advertising so that consumers can make an equivalent comparison between loans. If two loan offers have similar APRs, request a Good Faith Estimate (GFE) or Loan Estimate from each lender.

Lenders are required to provide this document, which shows all expenses associated with the mortgage, within three business days of the loan application date. Some lenders may be willing to supply a loan estimate for consumers who are shopping for a loan.

APRs on Adjustable Rate Mortgages (ARMs): What to know

It’s important to remember that the APR on ARMs will not apply for the life of the loan, as the payment on the loan will change as the economy fluctuates. APR on ARMs is calculated for the interest rate during the loan’s introductory period, and no one can predict how much the rate will increase in years to come.

A loan with a 7/1 ARM, for example, will have a fixed rate for the first seven years that is determined by the current economic conditions on the day the loan was approved. After seven years, the lender will begin to adjust the rate based on movement of the economic index, which likely will not be the same as it was when the loan was approved. Rates fluctuate daily, and no economic forecaster can predict where the index will be in 20 or 25 years.

Understanding mortgage interest rates

A mortgage rate is another term for interest rate, which is the rate that a lender uses to determine how much to charge a customer for borrowing money. Mortgage rates can be either fixed or adjustable.

Fixed mortgage rates do not change over the life of a loan. For example, if you take out a 30-year loan at a 4.25 percent interest rate, that rate will stay the same regardless of changes in the economy and market index, through the entire lifetime of the loan.

Adjustable rate mortgages (ARM), on the other hand, will change as the market changes after an introductory period, often set at five or seven years. That means your interest rate could go up or down depending on economic conditions, which will in turn raise or lower your payments.

ARMs, which are a common type of mortgage loan with an adjustable rate, often start with a lower interest rate than a fixed mortgage — but only for that introductory period. After that, the rate could go up as it adjusts to market conditions, which could raise your payment accordingly.

If you are considering an ARM, it’s important to talk to your lender first about what the adjustable rate could mean for your loan payment after the introductory period. The federal government’s Consumer Financial Protection Bureau (CFPB) recommends researching:

  • Whether your ARM has a cap on how high or low your interest rate can go.
  • How often your rate will be adjusted.
  • How much your monthly payment and interest rate can increase with each adjustment.
  • Whether you can still afford the loan if the interest rate and monthly payment reach their maximum under your loan contract.

How is your mortgage rate calculated?

Don’t be surprised if a lender offers you a mortgage interest rate that is higher than what is advertised. Each loan’s interest rate is primarily determined by market conditions and by the borrower’s financial health. Lenders take into account:

  • Your credit score: Borrowers with higher credit scores generally receive better interest rates.
  • The terms of the loan: The number of months you agree to pay back the loan can make a difference. Generally, a shorter term loan will have a lower rate than a longer term loan but higher monthly payments.
  • The location of the property you are purchasing: Interest rates are different in rural and urban areas, and sometimes they can vary by county.
  • The amount of the loan: Interest rates can be different for loan amounts that are unusually large or small.
  • Down payment: Lenders may offer a lower rate to borrowers who can make a larger down payment, which often is an indicator that the borrower is financially secure and more likely to pay back the loan.
  • Type of loan: While many borrowers apply for conventional mortgages, the federal government offers loan programs through the FHA, USDA, and VA that often offer lower interest rates.

How often do mortgage rates change?

Mortgage rates fluctuate on a daily basis. Because the market changes so often, lenders typically give borrowers the opportunity to lock in or float your interest rate for 30, 45, or 60 days from the day your lender approves your loan. That way you won’t get burned if rates rise soon after you secure a loan.

If you choose to lock in your rate, lenders will honor that rate within the agreed-upon time period before closing regardless of market fluctuations. Floating your rate will allow you to secure a lower interest rate before closing, should rates drop during that period.

How do mortgage rate changes impact the cost of borrowing?

Small differences in the interest rate can cost a borrower thousands of dollars over the life of the loan. Here’s an example for a 30-year, fixed-rate mortgage using our parent company LendingTree’s online mortgage calculator tool:

Mortgage (30-year)

Fixed interest rate

Monthly payment

Total borrowing cost

$200,000

3.65%

$914.92

$129,371.20

$200,000

3.85%

$937.62

$137,543.20

$200,000

4.25%

$983.88

$154,196.80

What’s a good rate on a mortgage?

While mortgage rates change daily, Nelson noted that mortgage rates have stayed low for several years now and don’t show signs that they will increase drastically in the nearly future.

LendingTree’s LoanExplorer tool recently showed interest rates for a 30-year, fixed-rate mortgage as low as 3.625% for borrowers with excellent credit.

Shop wisely

When shopping for loans, you can best compare loans by getting mortgage quotes from lenders at the same day on the same time. Online marketplaces such as LendingTree also can provide real-time loan offers from multiple lenders, which makes it easier to compare mortgage APR vs. interest rates.

Don’t be dazzled by low interest rates. If the loan’s APR matches its low interest rate, you likely have a good deal. Otherwise, investigate the costs and fees behind a loan’s APR to best determine which loan offer is the best deal.

Learn more about how you can compare quotes from lenders at LendingTree.com.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

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Maine First-Time Homebuyer Programs

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Do you want to live in a state with gorgeous seaside views and fresh lobster? Maine just might be the right place. Whether you’re new to the state or already call it home, if you need help coming up with a down payment, Maine offers several programs designed to help first-time homebuyers make their homeowning dreams a reality.In January of 2019, we researched first-time homebuyer programs in Maine, which included a review of the Maine State Housing Authority website and other state resources. Here’s what first-time homebuyers in Maine need to know.

Maine first-time homebuyer programs

The Maine State Housing Authority administers several federal and statewide programs aimed at providing affordable homeownership for Maine residents.

Their programs provide fixed-rate mortgages and assistance with down payments and closing costs to help put homeownership within reach. Their mortgages also come with payment protection, in the event that buyers face unemployment.

Eligibility for Maine assistance

Homebuyers who wish to take advantage of one of the Maine assistance programs must meet income and purchase-price limitations. Income and purchase-price limits vary, depending on how many people live in your household and the county in which you buy a home. You can find a list of current income and purchase-price limits online.

Eligible properties include new and existing single-family homes, owner-occupied two- to four-unit apartment buildings and condominiums. Manufactured homes located on owned land and built within the last 20 years are also eligible. However, the purchase-price limit for single-wide and double-wide manufactured homes is $150,000.

MaineHousing First Home Loan Program

The MaineHousing First Home Loan Program provides low fixed-interest-rate mortgages with low or no down payments. It can also provide up to $3,500 in assistance with down payments and closing costs.

Features

The First Home Loan Program offers

  • Thirty-year fixed-rate mortgages
  • Low or no down payments
  • Up to $3,500 in down payment and closing cost assistance
  • Low fixed interest rates
  • Low- and no-point options
  • The option to finance between $500 and $35,000 for necessary home improvements in the same loan

Eligibility

In order to participate in the program, you must

  • Have a minimum credit score of 640.
  • Take an approved homebuyer education class before closing if you take advantage of the down payment and closing cost assistance option.
  • Contribute at least 1% of the loan toward the purchase price of your home (the cost of the homebuyer education class counts toward this 1%).
  • Be a first-time homebuyer (not have owned a home within the past three years) or a veteran, retired military or on qualified Active Duty.
  • Meet household income limits, which vary by county and household size.

How it works

The First Home Loan Program is available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program and take you through the process of applying for and closing on the loan.

Learn more

MaineHousing Salute ME & Salute Home Again programs

The Salute ME and Salute Home Again programs help qualified active duty, veterans and retired military personnel achieve homeownership by giving them a 0.25% discount on First Home Loan mortgages.

Features

The Salute ME and Salute Home Again programs offer

  • An additional 0.25% discount on 30-year mortgages offered through the First Home Loan Program
  • Low or no down payments
  • Up to $3,500 in down payment and closing cost assistance
  • Low fixed interest rates
  • Low- and no-point options
  • Option to finance between $500 and $35,000 for necessary home improvements in the same loan

Eligibility

In order to participate in the programs, you must

  • Take an approved homebuyer education class prior to closing if you take advantage of the down payment and closing cost assistance option.
  • Have a minimum credit score of 640.
  • Be on active duty or have been honorably discharged from military service, have served on active duty for 180 days or within a war zone.
  • Use your new home as a primary residence.
  • Meet household income and purchase-price limits, which vary by county and household size.

How it works

MaineHousing programs are available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program and take you through the process of applying for and closing on the loan.

MaineHousing Mobile Home Self-Insured Program

The MaineHousing Mobile Home Self-Insured Program allows manufactured/mobile home buyers to get higher loan-to-value (LTV) mortgages and pay a higher interest rate instead of mortgage insurance premiums (MIPs).

Features

The Mobile Home Self-Insured Program offers

  • Up to 30-year loan terms
  • Down payments as low as 5%
  • Up to $3,500 in down payment and closing cost assistance
  • The option that 3% of the purchase price may come from a seller contribution
  • The option to add up to $35,000 to the loan for repairs

Eligibility

In order to participate in the program, you must

  • Be a first-time homebuyer (not have owned a home in the past three years), have only owned an unattached manufactured/mobile home on leased land, or be a veteran.
  • Pay a maximum of 33% of your income toward housing and have a maximum total debt-to-income (DTI) ratio of 41%.
  • Have a minimum credit score of 640.
  • Meet income limits, which vary by county and household size.
  • Have a maximum purchase price of $150,000.
  • Purchase a single-wide or double-wide manufactured home that is less than 20 years of age and is permanently attached per code at the time of closing.
  • Move into the home as your main residence.
  • Not use more than 15% of the home for a trade or business.
  • Contribute a minimum of 3% toward the purchase of the home.

How it works

MaineHousing programs are available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program, and take you through the process of applying for and closing on the loan.

National first-time homebuyer programs

If you want to buy a home in Maine, you’re not limited to first-time homebuyer programs available through the Maine State Housing Authority. There are other federal programs available to help first-time homebuyers across the country. If you’re interested in learning about national programs, start by checking out LendingTree’s guide to first-time homebuyer programs nationwide.

This article contains links to LendingTree, our parent company.  The information in this article is accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Rhode Island First-Time Homebuyer Programs

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying a new home is a scary prospect — and not just because change can be overwhelming. Figuring out how to afford a down payment, closing costs and monthly mortgage payments can feel like an Olympic gymnastics routine. Luckily, first-time homebuyers in Rhode Island have several programs that can provide assistance.

Whether you’re looking to pay less in taxes or you need help covering a down payment, the state’s solutions may be able to help you. We reviewed the state’s offerings to help you pick the best program for you.

Rhode Island first-time homebuyer programs

Rhode Island Housing offers affordable housing programs designed to make living in the state more attractive and affordable — no matter your financial situation. Not sure how to start your homebuying journey? The organization offers first-time homebuyer education for all buyers to help you understand the ins and outs of this complicated process.

But there’s real money available, too. The programs below offer down payment assistance, tax credits and affordable mortgages. They can even help you avoid paying mortgage insurance.

Eligibility for Rhode Island assistance

All of Rhode Island Housing’s first-time homebuyer programs — except for the First Down Program — require purchasing a house that costs no more than $441,176. Your new home can be a one- to four-unit home or a condominium.

And, of course, you must be a first-time homebuyer.

FirstHomes100

What is it?

Rhode Island Housing’s FirstHomes100 program helps first-time homebuyers at any income level afford a new place. The program combines a traditional mortgage with down payment assistance funds so you can finance your home 100%.

The FirstHomes100 program offers first-time homebuyers

  • One hundred percent financing
  • Assistance with down payment or closing costs through low-interest, 15-year loans
  • The ability to forego mortgage insurance in exchange for a slightly higher interest rate.

Requirements

In order to qualify for the FirstHomes100 program, you must

  • Purchase a house that costs no more than $441,176.
  • Buy a one- to four-unit single-family home or a condominium.

How to apply

If your income is less than $93,623 for a one- or two-person household, or less than $107,667 for a household of three or more, you’ll need to work directly with Rhode Island Housing’s Loan Center. Homebuyers with higher incomes can contact any participating lender to begin the loan application process.

Learn more

FirstHomes100+

What is it?

FirstHomes100+ is the sister program of FirstHomes100. It allows first-time homebuyers to not just purchase but also renovate the home of their dreams. Once buyers are approved for a FirstHomes100 mortgage, they’ll work with a consultant from the U.S. Department of Housing and Urban Development (HUD) to determine what repairs are needed. Once the final costs are determined, and if they exceed $5,000, the loan will become an all-inclusive FirstHomes100+ loan.

FirstHomes100+ provides buyers with

  • One hundred percent financing to buy and renovate the home of their choice.
  • Assistance with down payment or closing costs through low-interest, 15-year loans.
  • The ability to forego mortgage insurance in exchange for a slightly higher interest rate.

Eligibility

To be eligible for FirstHomes100+, first-time buyers must

  • Purchase a house that costs no more than $441,176 and that requires a minimum of $5,000 in renovations.
  • But a one- to four-unit single-family home or a condominium.
  • Complete FHA 203(k) Homebuyer Education before closing.

How it works

Buyers with incomes of less than $93,623 for a one- or two-person household or less than $107,667 for a household with three or more people will work directly with Rhode Island Housing’s Loan Center. If your income is higher, you can contact any participating lender to apply for the program directly through them.

Learn more

FirstHomes Tax Credit

What is it?

The FirstHomes Tax Credit is a federal tax credit for part of the mortgage interest you pay in a given year. A tax credit directly reduces the tax amount you owe. You can claim the tax credit every year, making this program helpful for years to come. Reduce your taxes even further by itemizing and deducting any other mortgage interest you’ve paid.

The FirstHomes Tax Credit offers buyers

  • A mortgage credit certificate for 20% of the total mortgage interest you pay each year.
  • Maximum credit of $2,000 a year.

Requirements

To be eligible for the FirstHomes Tax Credit, buyers must

  • Purchase a house that costs no more than $441,176.
  • Be buying a one- to four-unit home or a condominium.
  • Plan to live in the home as their primary residence.
  • Have income of less than $93,623 for a one- or two-person household, or less than $107,667 for a household of three or more.
  • You don’t have to be a first-time homebuyer if you live in the federally targeted areas of Central Falls, Pawtucket, Providence and Woonsocket.

How to apply

Ready to get started? Get in touch with Rhode Island Housing’s Loan Center or reach out to any of the approved lenders.

Learn more

First Down Program

What is it?

The First Down Program helps first-time homebuyers in the counties most affected by the recent foreclosure crisis. Through this program, buyers receive down payment assistance in the form of a second mortgage. As long as you live in the house full-time for five years, the assistance is forgiven. If you sell, refinance or no longer use the property as your primary residence, you’ll need to repay part of the loan.

The First Down Program offers buyers

  • A forgivable down payment assistance loan of $7,500.

Requirements

To be eligible for this down payment assistance program, first-time buyers must

  • Treat the home as their primary residence.
  • Purchase a home that costs no more than $454,250.
  • Be buying a one-to-four-unit home or condo.
  • Live in Cranston, Pawtucket, Providence, Warwick or Woonsocket counties.
  • Have income of less than $93,623 for a one- or two-person household, or less than $107,667 for a household with three or more people.

How to apply

Funds for this program are limited. Reach out to Rhode Island Housing’s Loan Center or a participating lender to get started.

Learn more

National first-time homebuyer programs

Rhode Island offers several helpful programs for first-time homebuyers, but buyers in the state should consider looking to nationwide programs, too. These programs can help you find an affordable mortgage, down payment and closing cost assistance, and federal tax credits.

LendingTree’s guide to first-time homebuyer programs can help you find the solution that works best for you.

This article contains links to LendingTree, our parent company.  The information in this article is accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Wiebe
Jamie Wiebe |

Jamie Wiebe is a writer at MagnifyMoney. You can email Jamie here

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