APR Guide

What is Annual Percentage Rate (APR)?

APR represents the total cost of borrowing, expressed as a yearly rate. It includes both the interest rate and other mortgage-related fees, providing a more comprehensive view of your loan costs.

Key Points About APR:

• Required disclosure under Truth in Lending Act
• Always higher than the base interest rate
• Helps compare loans on an equal basis
• Reflects the true cost of borrowing

Interest Rate vs. APR

Interest Rate:

• Base cost of borrowing money
• Used to calculate monthly principal and interest payments
• Determined by market conditions and borrower qualifications
• Does not include additional loan costs

APR:

• Includes interest rate plus other loan costs
• Provides more complete picture of loan expenses
• Usually 0.15% to 0.25% higher than interest rate
• Required disclosure by federal law

Fees Included in APR

Common Fees in APR Calculation:

• Loan origination fees
• Discount points
• Mortgage insurance premiums
• Underwriting fees
• Processing fees
• Document preparation fees

Fees Not Included in APR:

• Title insurance
• Property taxes
• Home insurance premiums
• Late payment fees
• Credit report fees
• Home inspection costs

How to Use APR When Comparing Loans

Best Practices:

• Compare APRs from multiple lenders
• Consider your planned length of homeownership
• Look at both APR and interest rate
• Request Loan Estimates from different lenders
• Consider the type of mortgage (fixed vs. adjustable)

Important Considerations:

• Lower APR doesn't always mean better deal
• APR assumes you'll keep loan for full term
• Different lenders may include different fees
• ARM APRs may not be directly comparable

APR and Different Mortgage Types

Fixed-Rate Mortgages:

• APR remains constant throughout loan term
• Easier to compare between lenders
• More predictable long-term costs
• Good for long-term homeownership

Adjustable-Rate Mortgages (ARMs):

• APR can change over time
• Initial APR may be misleading
• Consider rate caps and adjustment frequency
• Compare adjustment terms carefully

Common APR Questions

Why is APR Higher Than Interest Rate?

APR includes additional loan costs beyond the basic interest rate, making it a more comprehensive measure of borrowing costs.

Should I Focus on APR or Interest Rate?

Consider both - interest rate affects monthly payments, while APR shows total borrowing costs. Your decision may depend on how long you plan to keep the loan.

How Does APR Affect Monthly Payments?

APR doesn't directly affect monthly payments - these are calculated using the interest rate. APR helps you understand the total cost of the loan including fees.

Can APR Change?

For fixed-rate mortgages, APR remains constant. For ARMs, both the interest rate and APR can change based on market conditions and loan terms.

Tips for Evaluating APR

• Get quotes from at least 3-5 lenders
• Request all quotes on the same day
• Ask for a detailed breakdown of fees
• Consider your long-term plans
• Look at total loan costs, not just APR
• Understand what fees are included
• Consider negotiating fees to lower APR