The annual percentage rate (APR) is designed to show you the total cost of the loan, which can be helpful when comparing loans from different lenders.
The annual percentage rate measures both the interest charged as well as any other fees paid at closing that may include:
• Origination fees
• Private Mortgage Insurance — Insurance if you put less than 20% down.
• Discount points
• Pre-paid interest
• Processing fee
• Underwriting fee
• Document preparation fee
The APR is intended to help you calculate the true cost of borrowing, as it prevents lenders from advertising low interest rates and tacking on fees and other costs that drive up the cost of the loan.
APR does not include third party costs such as:
• Title fee
• Escrow fee
• Notary fee
• Home inspection fee
• Transfer taxes
• Credit report
• Recording fee
• Appraisal fee
• Notary fee
It’s important to keep in mind that APR spreads the fees paid upfront over the entire life of your loan. If you do not plan to keep your mortgage for the full term or plan to refinance, it may not be a good calculation for you to compare.
Ja Yung, a mortgage banker says: “So we like to think of it as kind of giving you the big picture of the overall cost of the financing, but the interest rate itself is what’s used to calculate your mortgage payment.”
JA YUNG: The most confusing term that I hear from home buyers would be APR, also known as annual percentage rate. The APR is very confusing because it looks and sounds a lot like an interest rate.
JA YUNG: The difference between an interest rate and the annual percentage rate — interest rate is what your mortgage payments are calculated on.
JA YUNG: The annual percentage rate basically takes into consideration not only the interest that you’re going to pay over the life of the loan but any costs associated with obtaining that loan, as well.
JA YUNG: So we like to think of it as kind of giving you the big picture of the overall cost of the financing, but the interest rate itself is what’s used to calculate your mortgage payment.