After completing the mortgage application, getting pre-approved for a home loan, and finding a property you’d like to purchase, your mortgage advisor will be able to write up a Loan Estimate.
The Loan Estimate breaks down all the estimated costs and fees of your mortgage, both the closing costs and your monthly payments over the life of the loan.
When you review your Loan Estimate, you’ll see your Interest Rate, Annual Percentage Rate (APR), and Total Interest Percentage (TIP).
Oftentimes, people can get these 3 mortgage terms confused, but they’re actually very different from each other. Here’s the breakdown:
Key takeaways
- What’s the difference between an Interest Rate, Annual Percentage Rate (APR), and Total Interest Percentage (TIP)?
- What fees and costs go into the APR?
Interest Rate
Interest is the additional amount of money that you pay each month in exchange for obtaining a loan. Your interest rate is a percentage that determines how much you will pay in monthly interest.
On your monthly mortgage bill, there’s the principal amount, which is the portion of your mortgage payment that goes toward paying off your home’s loan amount.
And in addition to your monthly principal payment is your monthly interest payment. The higher the interest rate, the higher your monthly interest payment.
There are a lot of different factors that affect what your interest rate will be such as the current market rates, your credit score, location, home price, loan amount, down payment, loan term, type of mortgage, and more.
One of the most common reasons why homeowners choose to refinance down the road is to get a lower interest rate in the future and save on their mortgage.
Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is not the same as your interest rate.
The APR is your interest rate plus all the other finance costs and lending fees that you pay in order to get a loan, and it’s expressed as a percentage rate.
The APR takes all the costs associated with obtaining your home loan such as the interest rate plus other charges like points, mortgage broker fees, prepaid finance charges, admin fees, or any fees that go directly to the lender, as these are all forms of finance charges.
Total Interest Percentage (TIP)
In addition to APR, there’s also the Total Interest Percentage or TIP.
This is the total amount of interest that you will pay over the loan term, expressed as a percentage of your loan amount.
In other words, it’s how much interest you’ll pay over the life of your loan compared to the amount that you borrowed.
Summary: Interest Rate, APR, and TIP
- Interest is the additional amount of money that you pay each month in exchange for obtaining a loan. Your interest rate is the percentage that determines how much you will pay in monthly interest.
- Annual Percentage Rate (APR) is your interest rate plus all other finance costs and fees that you pay in order to get a loan, and it’s expressed as a percentage rate.
- Total Interest Percentage (TIP) is the total amount of interest you pay over the life of your loan as compared to the amount that you borrowed.
