APR on Truth-in-Lending Explained

Annual Percentage Rate (APR)

Calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

For an adjustable-rate loan, the APR assumes the loan's index doesn't change from its initial value.

The APR of a 30 year fixed rate loan, will be different than the APR of a 15 year fixed rate loan. Also, ask for the Good Faith Estimate (GFE), to compare the different costs associated with your loan. APR is just one factor in determining which loan is best for you.

Remember that your APR DOES NOT affect your monthly mortgage payments. Your monthly payments are based on the interest rate, and the length of the loan.

In other words the APR is the TRUE cost of the loan.

The APR is also defined as the cost of credit to the borrower in relation to the amount borrowed expressed as a yearly rate. This is required by the federal Truth in Lending Act, Regulation Z.
A good tool to compare loans across different lenders is the Annual Percentage Rate (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates

The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.

An acronym in the Truth-in-Lending Act used to represent the costs involved in securing a loan. APR indicates the annual cost, as a rate, of paying for the mortgage. It usually includes, in addition to the interest rate, discount points, various fees and mortgage insurance.
If you see a loan with a lower interest rate, but a higher APR, it may or may not be in your best interest. Consult with your trusted mortgage professional to see which loan would be best for your particular situation.

Your APR is different than your Note rate and it does not affect your mortgage payments. It is a great tool in deciding which lender to go with, as long as the loan programs match up apples for apples.

Origination and discount points, prepaid interest, private mortgage insurance (PMI), and any lender fees such as processing, underwriting, credit reports, application fees, tax service fees and administrative fees are all used to calculate the APR.

APR (Annual Percentage Rate) should only be used to compare similar loan programs on an identical loan amount. The APR on a 30 year fixed loan cannot be compared well to a 3/1 ARM or an Option Arm. Also, identical loan programs and rates will give different APRs depending on the loan amount. For example, the APR will be lower on a $250,000 loan than on a $150,000 loan using the same interest rate.

The APR is a federal disclosure.

With a credit card, your APR is generally the same as your interest rate. With a mortgage the APR is always higher than the interest rate due to closing costs.