The interest cost (IC) of a loan is a detailed measure of loan cost to the borrower that also takes into account the critical element of time as a variable.
For a mortgage, the loan amount after deducting all upfront fees including points is the cash received upfront.
Interest cost takes into account all the payments that will be made by the borrower over the life of the loan as an expression to the cash received upfront.
When it comes to an ARM, IC factors in the assumption of future changes in interest rates.
In doing so, details the effects interest rate changes have on the outstanding balance and monthly payments.
It is inevitable that interest cost is compared to annual percentage rate (APR).
There are 3 main differences between the two.
The first key difference between the two is that IC takes into account the time horizon of a loan.
On the other hand, APR assumes that all loans run it’s full course to maturity.
Secondly, when it comes to an adjustable rate mortgage, IC can be applied on any interest rate scenario even when changes are observed.
APR only calculates based on no changes in interest rates.
Thirdly, APR is measured before taxes, while IC is measured after.
This can be an important factor when doing doing tax planning.