How does APR Relate to Your Mortgage Loan
A mortgage is often the largest and most complicated loan you will receive. Therefore, it is important that you, the borrower, understand all the costs and mortgage tems involved so you can make an informed decision. The term APR (Annual Percentage Rate) was specifically developed to help consumers understand the relative cost of a transaction. As such, it is a particularly useful factor to consider when comparing similar loans.
How was the APR Developed
To help borrowers understand loan transactions and to help you compare loans offered by differant lenders, the Truth-In-Lending Act requires creditors to provide information to consumers about the conditions, terms, and costs of a loan. This federal law is administered under a Federal Reserve Board regulation known as Regulation Z. The APR is one of the disclosures required under this law.
Why is an APR an Important Disclosure
APR is a measure of the total cost of your mortgage expressed as a yearly interest rate. It is designed to help you determine the relative cost of a loan you are considering.
The annual percentage rate is based on a rather complex mathematical formula that is outlined in Regulation Z. In essence, it 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, reflects as a dollar amount the costs associated with the loan, including interest and other payments required of the borrower such as points, loan fees, origination fees, application fees, and insurance.
With these fees and costs added to the mortgage loan you desire, the effective APR is often higher than the actual rate of interest charged for the loan. Example:
- Type of Loan - Fixed Rate
- Intial Interest Rate - 7.00%
- Loan Term - 30 years
- Amount of Loan - $100,000
- Total Prepaid Charges - $1,000.00
- APR - 7.0989%
What is the Difference Between the Interest Rate and the APR
The APR is an artificial measurement of the relative cost of your loan transaction. It dosen't have any bearing on the actual rate of interest you pay on a particular loan, but your loan rate of interest is part of the calculation.
Comparing the APR of different mortgage loans you are considering is an important tool to help you measure the relative cost of each loan. It is not the only factor you should consider, however, before making a decision.
You need to take into account other factors such as the interest rate and any fees or charges required by the lender. A lower APR on one loan dosen't necessarily ensure that it is the best mortgage loan for you.
Your best course of action is to consult your loan officer. He/She can calculate the APR of various loan programs and help you understand all of the costs associated with obtaining your mortgage loan. Please ask as many questions as you want - the final decision is yours. Our goal is to help you find the right mortgage for the purchase or refinance of your home.
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