Mortgage Rates: APY vs. APR

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mortgage-rates-apy-vs-aprMortgage Rates: We have all seen rates offered as APY or APR. APY means annual percentage yield and APR means annual percentage rate. The different between the two is compounding interest. 

Compounding interest can be interest you earn on-top of interest you already earned, like on certificates of deposit. The more frequently interest is compounded the higher the APY will be.

On mortgages, the rate is interest you pay, just like on deposit products, the more interest is compounded the higher the APY will be. Though in this case you'll end up paying more for a loan that compounds more often. Banks and lending institutions usually publish the APY or APR that makes the rate of return higher in the case of deposit products and lower in the case of loans.

When you compare mortgage rates from different banks make sure you are comparing apples to apples. To make it easier for consumers to compare mortgage loan interest rates, the federal government developed a standard format called an "Annual Percentage Rate" or APR to provide an effective interest rate for comparison shopping purposes.

For mortgage loans, banks usually will quote an APR  but when you are quoted a mortgage rate be sure to ask the mortgage broker or lending institution if the rate is the APR or APY so there are not any nasty surprises when you are about to close on a loan.

Tip: Before closing on a mortgage be sure to ask the mortgage broker, bank or lending institution to provide you a  HUD-1 statement. The HUD-1 will give you a statement of actual charges and adjustments. Having this information before hand will prevent any nasty surprises at the closing.

Author: Robert Till
May 30th, 2009