Definition of Annual Percentage Rate (APR)
A question we often get is how is the annual percentage rate different than the interest rate?
The Annual Percentage Rate, also known as APR, is the annual rate charged for borrowing money, the actual yearly cost of funds over the term of the loan. This includes any fees or additional costs associated with the transaction of getting a home loan. The interest rate is the rate at which interest is paid by the borrower for the use of money provided by the lender without the lender fees added in.
A brief explanation of Annual Percentage Rate (APR)
Loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors. A standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other potential lenders.
By law, loan issuers must show home buyers the APR to facilitate a clear understanding of the actual rates applicable to their agreements. The bottom-line cost of the loan is best shown by looking at the APR. By comparing multiple loan offerings, a borrower can get the best idea which loan is in the best interest rate by choosing the loan with the lowest APR. You need to make sure you are comparing apples to apples though. There is no relevant comparison by comparing the APR of an adjustable-rate mortgage (ARM) and that of a fixed loan. An ARM is an adjustable-rate mortgage where the interest rate on the note adjusts based on an index which reflects the cost to the lender from borrowing on the credit markets.
But I’ll dig into the pros and cons of an ARM versus a fixed loan for another posting…
For more information please feel free to contact me directly.