What Is Annual Percentage Rate (APR) For Home Mortgages

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The annual percentage rate (APR) is the cost of a loan and is calculated by using a standard formula. This yields an interest rate that includes all fees related to the loan, including the mortgage insurance, points, interests, etc.

It is important to know that the amount of money you pay monthly is not affected by the APR. Monthly payments are determined by the term of your loan and the interest rate.

However you must take the APR into consideration when you are contemplating any given home loan. A loan that boasts a low interest rate but has a high APR is not a good bet. Always talk with a qualified mortgage specialist at your financial institution for sage advice.

The APR will be different for loans that are of different durations. For example, a 20 year fixed rate loan will have a different annual percentage rate than will a 30 year loan that also has a fixed rate.

In order to compare the costs from one loan to another it is wise to consult the Good Faith Estimate (GFE). The APR is important but it is only one of many important aspects of a home loan.

When you compare the APR from one financial institution to another, make sure that they are on a level playing field. In other words compare loan programs that are the same, as opposed to completely different. Remember though that the APR will be different depending on the amount of money you wish to borrow. A loan for $250,000 will have a lower APR than will a loan for $100,000 even thought it has the same interest rate. Keep in mind as well that an adjustable rate mortgage loan has an APR that is aware that the loan is indexed and as such that it does not change from its beginning value.

Other Important Aspects of the APR

What else is the APR? It is also the “cost of credit to the borrower in relation to the amount borrowed.” This is always calculated as an annual rate. This is a necessity as stipulated by the Federal Truth in Lending Act, Regulation Z.

A number of items are used to effectively calculate the APR. These include private mortgage insurance (PMI), origination and discount points and prepaid interest. This also takes into consideration any lending fees such as processing, credit reports and underwriting. As well, application fees, administrative fees and tax service fees are a part of this.

Be aware that not all mortgage lenders use the same fees which which to calculate the true cost of a mortgage. APR is a useful tool but be forewarned about the different ways it may be used.

The Federal Truth in Lending Act is a disclosure form that by law must be given to all individuals looking to apply for a mortgage loan. When rates are advertised, the APR MUST be disclosed. All of the bank fees that a lender could charge are here which is why it works well for the purposes of comparison. The true cost of a mortgage loan when you get down to the nitty gritty is what the APR constitutes. The APR helps to keep lenders honest because upfront costs and fees cannot be disguised behind interest rates that are advertised as low.

To use an example from the real world- if you visit one lender and are offered a loan with an interest rate of 6.25 percent with one discount point and another lender offers you a loan with  an interest rate of 6.5 percent  and zero points then how do you decide which one is the better deal of the two?

Whichever loan has the lowest APR would be the most suitable choice. Bear in mind however that this does not take into account other aspects of the prospective borrower’s financial situation such as his job stability, how much money he has in reserves and how longs he plans to reside in the home he wishes to purchase.

Be aware that the APR is not the same as a note rate. When you have a credit card the APR is often the exact same as the interest rate. However when you take out a mortgage, the APR will be higher than the interest rates you pay due to closing costs.