When consumers borrow money from a financial institution, the interest paid on the loan is the largest, but not the only component of the cost of borrowing money. There are other costs and fees that the borrower must incur, such as closing costs or “points” paid on a mortgage. These costs vary by lender and even among different loan options offered by the same lender. This makes it impossible to compare the true cost of different loan offers. The Annual Percentage Rate, or APR, refers to the total cost of borrowing, as the calculation for APR includes not only the interest rate, but also many other fees the borrower might be charged. So APR is seen as the “effective interest rate,” a way for borrowers to compare one loan to another. A loan’s costs are taken into consideration in APR, a loan with a lower interest rate may actually be more expensive than previously assumed and the APR is a helpful way for the consumer to shop.
In the financial labyrinth, the intricate link between the Federal Reserve’s interest rates and mortgage rates often perplexes both novice and seasoned investors alike. Understanding