Annual Percentage Rate, APR
Annual Percentage Rate, also commonly referred to as APR, is supposed to
express the true cost of borrowing money. By comparing APR's amongst the
different lenders you are supposed to be able to tell who has the best deal
for you. However, this is not exactly the case as different lenders factor
in different items into their APR's. By not having one common set of rules
and guidelines for all to follow in regards to APR, it is not always
possible to decide who has the best deal for you by using Annual Percentage
Rate, or APR, alone.
Calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.
The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.
If you see a loan with a lower interest rate, but a higher APR, it may or may not be in your best interest. Consult with your trusted mortgage professional to see which loan would be best for your particular situation.
The APR of a 30 year fixed rate loan, will be different than the APR of a 15 year fixed rate loan. Also, ask for the Good Faith Estimate (GFE), to compare the different costs associated with your loan. APR is just one factor in determining which loan is best for you.
Remember that your APR DOES NOT affect your monthly mortgage payments. Your monthly payments are based on the interest rate, and the length of the loan.
The APR is also defined as the cost of credit to the borrower in relation to the amount borrowed expressed as a yearly rate. This is required by the federal Truth in Lending Act, Regulation Z.
Origination and discount points, prepaid interest, private mortgage insurance (PMI), and any lender fees such as processing, underwriting, credit reports, application fees, tax service fees and administrative fees are all used to calculate the APR.
While an APR is a good tool to use to help find the true cost of a mortgage loan there can be some variance between lenders when calculating APR. What fees one lender uses to calculate APR may not be exactly the same what another lender uses. So please keep this in mind when comparing two different loan to each other and using APR as a tool.
An acronym in the Truth-in-Lending Act used to represent the costs involved in securing a loan. APR indicates the annual cost, as a rate, of paying for the mortgage. It usually includes, in addition to the interest rate, discount points, various fees and mortgage insurance.
The APR is found on the Truth In Lending, a disclosure form that is required by law to be given to potential borrowers. Because the APR takes into considerations all the bank fees a lender charges, it is a good tool to compare different loan offers. For instance, one bank offers a borrower a mortgage loan with an interest rate of 6.25% with 1 discount point (meaning the borrower pays the bank 1% of the loan amount at closing in order to get the 6.25% interest rate), and another offers a loan with 6.5% interest rate and 0 point, how would the borrower know which to choose? Without consideration to the borrower's financial situation such as his cash reserves and how long he intends to live at the property, the loan with the lower APR is the better choice.
In other words the APR is the TRUE cost of the loan.
A good tool to compare loans across different lenders is the Annual Percentage Rate (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates
Your APR is different than your Note rate and it does not affect your mortgage payments. It is a great tool in deciding which lender to go with, as long as the loan programs match up apples for apples.
The APR is a federal disclosure.
With a credit card, your APR is generally the same as your interest rate. With a mortgage the APR is always higher than the interest rate due to closing costs.
APR (Annual Percentage Rate) should only be used to compare similar loan programs on an identical loan amount. The APR on a 30 year fixed loan cannot be compared well to a 3/1 ARM or an Option Arm. Also, identical loan programs and rates will give different APRs depending on the loan amount. For example, the APR will be lower on a $250,000 loan than on a $150,000 loan using the same interest rate.
For an adjustable-rate loan, the APR assumes the loan's index doesn't change from its initial value.
If you have any questions regarding our products, you can contact us by calling or e-mailing us and we'll get back to you as soon as possible. Thanks!
Information listed above is to be used for educational purposes only and is not guaranteed