Interest Rate vs. APR on Owner Financed Land

If you’re thinking of buying land, then it’s a good idea to brush up on some terms commonly used in the finance world. You’ve probably heard the terms interest rate and annual percentage rate (APR) many times in your life, but you may not be aware of the difference between the two.

Anytime you’re considering a loan — in the form of a mortgage, a credit card balance, or an owner financed land deal — these definitions are essential to understanding the terms of that loan. First, we’ll go over what an interest rate is vs. an APR. Then, we’ll break down in detail what this means if you purchase land through Land Elevated. So read on to find out all about interest rate vs. APR on owner financed land.

Interest Rate vs. APR: What’s the Difference?

Both interest rates and APRs are ‌expressed as percentages, which can make things confusing. However, there are usually some very distinct differences between an interest rate and an APR.

Interest Rate

An interest rate is the percentage a borrower will pay on the principal loan amount. This percentage is used to determine the cost of borrowing the principal amount of the loan. Since interest rates are calculated yearly, loans with shorter terms will require larger payments up-front but will be more favorable in terms of total interest paid than loans with longer terms.

Interest rates fluctuate for a number of reasons, but the most notable one is the Federal Reserve. In times of economic growth, interest rates tend to rise to encourage saving rather than spending. During recessions, interest rates tend to lower, encouraging people to spend and secure loans.

While a loan’s interest rate is certainly a number you should be aware of, it’s not a complete number for determining the pertinent details of a loan.

APR

An APR (Annual Percentage Rate) includes the interest rate the borrower will pay on the principal loan amount plus any fees included in the management of the loan. On a mortgage, these fees will often include things like mortgage insurance, closing costs, and brokerage fees. These fees don’t affect your interest rate, but they do need to be factored into your monthly payments.

On a personal loan, the APR often includes a one-time origination fee. Like interest rates, APRs are also expressed as percentages.

Unfortunately, it can be difficult to determine the monthly payments when breaking down an APR on a loan. Since these loans are paid off monthly — combining the interest rate, fees, and payments on the principal — it requires a somewhat complex formula.

As you pay off the loan, the principal lowers. And since you only pay the APR on the principal, the amount of the monthly payment that goes toward the principal and the interest changes each month. As you make payments on the loan, the portion of your monthly payment that goes toward the interest lowers — because you’re lowering the principal. Meanwhile, the portion of your standard monthly payment that goes toward the principal increases.

Then, at the end of the loan term, you’ve paid both the interest and the principal in full.

This can be hard to grasp at first. Luckily, there are plenty of online loan calculators you can use to determine the specifics of a given loan.

Now, you can see what the difference between an APR and an interest rate is. The interest rate of a loan is included in the APR, but it’s not the same thing. This is why an APR will always be equal to or higher than the interest rate.

Using the APR to Shop Around

As you can tell, the APR is a more complete number than the interest rate alone. While it’s a good idea to pay attention to both numbers, you can use the APR to shop around for the best loan deal. By comparing the APRs on two different loans, you can generally tell at a glance which one will be best. If all else is similar, the one with the lower APR will generally be better.

However, this shouldn’t be the sole factor you look at. It’s just useful at a glance, helping you weed out deals without doing intensive research. Luckily, most lenders are required by law to provide the APR on a loan before you agree to said loan.

But how does this work when it comes to Land Elevated or other owner financed land deals? What kind of fees contribute to the APR on a land loan?

Read on to find out!

Land Elevated Interest Rates, Fees, and APRs

Here at Land Elevated, our mission is to make buying land simple, affordable, and transparent. But we also realize that it can sometimes be hard to sort through all the details of any land deal.

Unlike other land sale sites out there, we own every piece of land we sell. There are no third parties selling through our site. This allows us to research and vet every single piece of land we sell. It also allows us to provide affordable financing for those who want to purchase land but don’t have the lump sum to do it all at once.

So in this section, we’ll go through what everything means so you know exactly what you’re looking at when you browse our site. The following are terms you’ll see on our listings, and what exactly they mean for a potential buyer.

Principal

This refers to the loan amount that Land Elevated extends to you for the purposes of purchasing a property. This is how owner financing (sometimes called seller financing) works. The seller essentially loans the value of the property to the buyer, who agrees to pay that principal back with interest. But when you see the term “principal,” it only refers to the amount of the loan without interest included.

Interest

The interest is the fee for borrowing money. Expressed as a percentage, this is what a buyer will agree to pay on top of the principal amount. We’ve already discussed interest quite a bit, especially in how it contributes to the APR.

Property Taxes

Property taxes are local taxes levied by the government. All property owners pay these taxes, and they’re usually based on the value of the property. They fund things like schools, roads, and other community functions or services.

These are paid monthly to the local government. And in an effort to make things as easy as possible for our customers, Land Elevated includes property taxes in the monthly payment, collecting them and paying them on behalf of the landowner until we transfer the deed when the property is paid in full.

HOA Fees

An HOA is a homeowners association. While not every piece of land you’ll see on Land Elevated is part of a homeowners association, some of them are. And if they are — we include this information in the listing — then there will be a homeowners association fee. It’s also important to note that any property with an HOA will also have certain rules that property owners will need to follow.

If the property does have a homeowners association, we collect the fee from the buyer and pay it on their behalf. 

Service Fee

Lastly, we include a monthly service fee when calculating the monthly payment on any given property. This is a flat $10 per month standard note service fee, no matter the size, cost, or type of land.

What’s Included in the Land Elevated Monthly Payments?

The monthly payment we calculate for a property includes the property taxes, the HOA fees (if there are any), and our monthly service fee of $10. It also includes payment on the principal and the interest of the loan.

You can take the numbers on the listings and put them into a loan calculator to see the breakdown of interest and principal payments each month. But if you do this, make sure to include the property tax and the $10 monthly fee as separate from the total loan amount. Since you don’t pay interest on the property tax or the monthly fee, it can skew the loan calculator’s results if you include them.

At the end of the day, one simple payment means customers only have to worry about one monthly payment, instead of paying several different organizations every month.

This is one thing that makes purchasing owner financed land with Land Elevated easy and convenient.

Interest vs. APR on Owner Financed Land: Conclusion

We hope this has helped to clear up the difference between interest rates and APRs, especially as they pertain to owner financed land sales. Our team works hard to research the best properties and provide all the relevant information to potential landowners. This allows us to guarantee a clear title on each and every property we sell. That said, we always suggest you do your own due diligence before purchasing a property.

Check out this article on due diligence for more information. You can also find important contact information on each land listing for performing due diligence. For more information on the land-buying process or help with a particular property, contact us today. We have dedicated Land Specialists ready to help!