What does APR mean?

APR is Annual Percentage Rate. It is an interest rate that is different from the note rate. It is the rate that is used to compare loan programs from different lenders. The Federal Truth in Lending law requires that mortgage companies disclose the APR when they advertise a rate. The APR is found next to the rate.

The APR does NOT affect your monthly payments. Your monthly payments are a figured by the interest rate and the length of the loan. The APR is designed to measure the "true cost of a loan." Unfortunately, lenders calculate APRs differently, So a loan with a lower APR does not always offer the best rate.

The following fees ARE generally included in the APR:

bullet Points - both discount points and origination points
bullet Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
bullet Loan-processing fee
bullet Underwriting fee
bullet Document-preparation fee
bullet Private mortgage-insurance

The following fees are SOMETIMES included in the APR:

bullet Loan-application fee
bullet 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:

bullet Title or abstract fee
bullet Escrow fee
bullet Attorney fee
bullet Notary fee
bullet Document preparation (charged by the closing agent)
bullet Home-inspection fees
bullet Recording fee
bullet Transfer taxes
bullet Credit report
bullet Appraisal fee

An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!

Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.

Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.

Finally, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!

Conclusion :
Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan. Join our Rate Watch program to stay up to date on how interest rates effect you.

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