When shopping for a mortgage, two terms that you are likely to come across are “contract interest rate” and “APR.” These terms are often used interchangeably, but they actually refer to two different things.
The contract interest rate, or CIR, is the rate at which you will borrow the money for your home loan. This is the rate that you and your lender agree upon and is often expressed as a percentage of the total loan amount. For example, if you borrow $200,000 at an interest rate of 4%, your CIR would be 4%.
The APR, or annual percentage rate, is a broader measure of the cost of borrowing money that includes not only the contract interest rate but also other fees and charges associated with the loan, such as points, origination fees, and mortgage insurance. The APR is expressed as a percentage and is typically higher than the contract interest rate.
So why is the APR higher than the CIR? Essentially, it`s because the APR takes into account all of the additional costs associated with the loan. These costs can be significant and can add up to thousands of dollars over the life of the loan. By including these costs in the APR, lenders are able to provide borrowers with a more accurate picture of the true cost of borrowing money.
It`s important to note that the APR and CIR can vary depending on a number of factors, including your credit score, the type of loan you are applying for, and the lender you are working with. As a result, it`s important to shop around and compare rates and terms from multiple lenders before making a decision about which loan to choose.
When comparing loans, it`s also important to consider both the CIR and the APR. While the CIR may be lower, the APR may be higher due to additional fees and charges. By comparing both rates, you can get a better sense of the true cost of borrowing money and make an informed decision about which loan is right for you.
In summary, the contract interest rate and the APR are two important terms to understand when shopping for a mortgage. While they are often used interchangeably, they actually refer to two different things. The CIR is the rate at which you will borrow money, while the APR includes all of the additional fees and charges associated with the loan. By comparing both rates, you can get a better sense of the true cost of borrowing money and make an informed decision about which loan is best for you.