What is an Annual Percentage Rate (APR)?
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is
commonly used to compare loan programs from different lenders. The Federal Truth in Lending
law requires mortgage companies to disclose the APR when they advertise a rate, and when a
borrower has applied for a loan. Typically the APR is found next to the rate.
Example: 30-Year Fixed, 8%, 1 Point, 8.107% APR
The APR does NOT affect your monthly payments. Your monthly payments are a function of the
loan amount, the interest rate and the length of the loan.
The APR can be a confusing number. Even mortgage bankers and brokers admit it is confusing.
The APR was designed to measure the "true cost of a loan", create a level playing field for lenders,
and prevent lenders from advertising a misleadingly low rate and hiding fees.
If life were easy, all you would have to do is compare APRs from the brokers you are working with,
then pick the lowest.
Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not
necessarily a better rate. The best way to compare loans is to ask lenders to provide you with a
Good Faith Estimate of costs on the same type of loan program (e.g. 30-year fixed) at the same
interest rate. Then delete all fees that are independent of the loan such as homeowners
insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees charged by the
lender. The lender that has lower loan fees has a cheaper loan.
The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
What fees are included in the APR?
Most lenders include these fees in the APR:
Some lenders include these fess in the APR:
Most lenders DO NOT include the following fees in the APR:
Other Items to Note
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. This is because a shorter
term rate lock will either have a lower rate or possibly a closing credit.
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 pre-
packaged 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 working with an open and responsive AmeriStar
Loan Officer, and getting a Good Faith Estimate of closing costs to review. And remember to
exclude those costs that are independent of the loan when making any comparison between
lenders.
back to FAQ
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is
commonly used to compare loan programs from different lenders. The Federal Truth in Lending
law requires mortgage companies to disclose the APR when they advertise a rate, and when a
borrower has applied for a loan. Typically the APR is found next to the rate.
Example: 30-Year Fixed, 8%, 1 Point, 8.107% APR
The APR does NOT affect your monthly payments. Your monthly payments are a function of the
loan amount, the interest rate and the length of the loan.
The APR can be a confusing number. Even mortgage bankers and brokers admit it is confusing.
The APR was designed to measure the "true cost of a loan", create a level playing field for lenders,
and prevent lenders from advertising a misleadingly low rate and hiding fees.
If life were easy, all you would have to do is compare APRs from the brokers you are working with,
then pick the lowest.
Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not
necessarily a better rate. The best way to compare loans is to ask lenders to provide you with a
Good Faith Estimate of costs on the same type of loan program (e.g. 30-year fixed) at the same
interest rate. Then delete all fees that are independent of the loan such as homeowners
insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees charged by the
lender. The lender that has lower loan fees has a cheaper loan.
The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
What fees are included in the APR?
Most lenders include these fees in the APR:
- Points: Both Discount Points and Origination Points
- Pre-Paid Interest: 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, lenders
may use any number between 1 and 30 - Loan Processing Fee
- Underwriting Fee
- Document Preparation Fee
- Private Mortgage Insurance
Some lenders include these fess in the APR:
- Loan Application Fee
- Credit Life Insurance: Insurance that pays off the mortgage in the event of a borrowers death
Most lenders DO NOT include the following fees 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 Fee
- Appraisal Fee
Other Items to Note
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. This is because a shorter
term rate lock will either have a lower rate or possibly a closing credit.
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 pre-
packaged 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 working with an open and responsive AmeriStar
Loan Officer, and getting a Good Faith Estimate of closing costs to review. And remember to
exclude those costs that are independent of the loan when making any comparison between
lenders.
back to FAQ
the only place to "Pre-Apply.com"
| The FAST Track About Us Today's Rates Apply with AmeriStar Tools & Info Testimonials Contact Us Rate Alert Tell A Friend Refer A Friend Enter Our Giveaway Number Cruncher Privacy Policy FAQ & Forms |
Locally Owned, Locally Operated
Financing Maryland Homes Since 1999
Financing Maryland Homes Since 1999
SM
Finance My Home Purchase (click the house!) |
Take Out a Home Equity Loan (click the house!) |
Refinance My Mortgage (click the house!) |
| H o w C a n W e A s s i s t Y o u T o d a y ? |
Pre-Apply.com is a service of AmeriStar Home Mortgage, Inc. Information is deemed reliable but not guaranteed,
and is subject to change at any time. Use of this site for informational purposes, and does not constitute a
commitment to lend. Equal Housing Lender. © 2007AmeriStar Home Mortgage, Inc.
and is subject to change at any time. Use of this site for informational purposes, and does not constitute a
commitment to lend. Equal Housing Lender. © 2007AmeriStar Home Mortgage, Inc.
or call toll-free 1.877.PRE.APPLY
(1.877.773.2775)
(1.877.773.2775)
| 877.PRE.APPLY |