It’s true! A lower Annual Percentage Rate (APR) could mean lower monthly mortgage payments. The first step to reducing your APR is understanding exactly what it is and is not; understanding APR may help you make better-informed decisions when exploring your mortgage options.
First, anyone who has applied for a car loan, mortgage, or credit card is subject to APR. According to the Consumer Financial Protection Bureau (CFPB), the Annual percentage rate (APR) represents the price you pay to borrow money.
What APR is Not:
APR is not the same as APY- You may have also seen the term APY. And while it might seem like a similar term to APR, it’s much different. APY stands for Annual Percentage Yield- it’s sometimes known as EAR, or Effective Annual Rate, instead. While APR measures the interest you’ll be charged when you borrow, APY/EAR measures the interest you earn when you save.
APR is different from Interest rate- The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other additional charges you may have to pay for your loan.
An APR is a broader measure of the cost of borrowing money than the interest rate; APR reflects interest rates, points, mortgage broker fees, and any other charges you pay to get a loan. For that reason, your APR is typically higher than your standard interest rate.
The next step to reducing your APR is knowing how it’s calculated. Many variable factors affect the APR rates that you’re offered- these include your credit history, credit score, and credit activity. There’s a standard formula most lenders utilize to calculate the APR, which is multiplying the periodic interest rate by the amount of payment periods in the year(s) in which the loan was applied.
Considering the variables of credit a borrower may have (credit score, payment and repayment history, etc.) being entered into a fairly rigid calculation to determine your APR rates, it’s fairly easy to indirectly address and improve the rates of your APR by improving your own credit and overall finances. Make more timely credit card, student loan, and monthly bill payments. Pay down your loan debt as much as possible.
If your APR remains higher than you would like, it may be best to try reaching out to a representative with your lender. You can submit a request to update your credit scores in order to refinance your APR on an existing loan. Some lenders are more rigid in their policies than others; sometimes it may be in your best long-term financial interest to pay off the loan/credit balance as soon as you can, in order to avoid any further APR gouging. In cases such as this, it’s important to consider the difference between Introductory/ Promotional APR and Purchase APR.
Introductory or Promotional APR typically offers a lower APR for a limited time and is scheduled to increase after your introductory period ends. It is vital to remember that Introductory APR does not last forever—it’s a limited-time offer that will expire and give way to the standard rate applied to your balance. If you choose to take advantage of introductory APR, be knowledgeable about when it will end and when the new, standard rate will begin. Often the excitement of a low APR blind borrower to the fine print that details the significantly higher standard rate of their loan. Wisely evaluating attractive offers is an essential step to reducing your APR. I might remind you of the old warning,”The cure to love at first sight is second sight.”