What Does APR Mean?
It is important for borrowers to understand all of the costs and information being presented when shopping for a mortgage loan.
Where does an APR come from?
The Truth in Lending Act is a federal law that requires creditors to provide information to consumers about the terms and costs of a loan. The intent is to help consumers better understand loan transactions, and to assist them in comparing loans offered by different lenders. The law is administered by a Federal Reserve Board regulation known as Regulation Z. One of the required disclosures that lenders must make in a mortgage loan transaction is something commonly referred to as an APR.
What is an APR and what does it represent?
APR is an acronym for Annual Percentage Rate. This term was specifically designed to help consumers understand the relative cost of a transaction, and to guide them in their search for the best loan.
How is an APR determined?
The concept of the annual percentage rate can be difficult to understand because it is based on a complex mathematical formula, which is prescribed in Regulation Z. What is important to understand though, is that the APR is a measure of the cost of credit expressed as a yearly rate.
The APR reflects the amount being financed, the interest rate, the timing of the payments, and any other costs (prepaid charges) required as a condition of the mortgage loan that make up the finance charge. The finance charge, another required disclosure under the Truth in Lending Act, expresses as a dollar amount the costs associated with the loan, including interest and charges payable by the borrower such as points, loan fees, origination fees, and private mortgage insurance, to name a few.
What is an example of an APR?
When the various components mentioned above are factored together using the APR formula, the APR can be calculated. Because the APR takes into consideration the various fees that are required as a part of the loan, the APR is often higher than the actual rate of interest for the loan.
Example:
| Type of Loan |
Fixed Rate |
| Initial Interest Rate |
8.000% |
|
| Loan Term |
30 years |
| Amount of Loan |
$90,000 |
| Total Prepaid Charges |
$2,673.27 |
| |
|
| APR |
8.5273% |
What is the difference between the interest rate and the APR?
Keep in mind that the APR is an artificial measurement of the relative cost of the loan transaction. It does not have a bearing on the actual rate of interest on a particular loan, but it does take the rate of interest into account. Your loan officer can calculate the APR of various loan programs for you and can explain why these differences and APRs occur.
Because the APR expresses the overall cost of the loan as a percentage, comparing the APR of a particular mortgage loan with a similar loan is one way to measure the relative cost of the loans. This isn't the only factor to consider when getting a mortgage loan, but it can be very useful in helping you decide.
Be sure to take into account all of the other information that is provided to you by your loan officer including the interest rate and any fees or charges that you have to pay. Just because an APR is lower on one loan than another, it doesn't necessarily mean that particular mortgage is the best loan for you.
Consult with us. As your loan officers, we will help you understand all of the costs associated with obtaining your mortgage loan and guide you on your way to purchasing or refinancing your home.