APR (Annual Percentage Rate)
What is an APR?
The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the note rate or advertised interest rate, because it takes into account loan fees and other costs of credit. In theory, the APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. The APR is meant to establish an easily measurable comparison of different loans. However, because different lenders calculate APRs differently, a loan with a lower APR is not necessarily a better loan.
The APR does not affect your monthly payments. Your monthly payments are strictly a function of the interest rate and the length of the loan.
The best way to compare loans is to ask lenders to provide you with a Good Faith Estimate Disclosure defining their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. You then subtract the fees that are independent of the loan such as homeowners insurance, title fees, escrows, attorney fees, etc. The remaining fees are the actual loan fees that are variable from lender to lender. The lender that has lower loan fees, with the same or lower interest rate, has the better loan.
The following fees are generally included in the APR:
- Points - both discount points and origination points
- Pre-paid interest. The interest paid from the date the loan closes to the end of the month.
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage-insurance
The following fees are sometimes included in the APR:
- Loan-application fee
- Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)
The following fees are normally not included in the APR:
- Title or abstract fee
- Escrow fee
- Attorney fee
- Notary fee
- Document preparation (charged by the closing agent)
- Home-inspection fees
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
