What is the difference between the interest rate and the A.P.R.?

You'll see an interest rate and an Annual Percentage Rate (APR) for each mortgage loan you see advertised. The easy answer to "why" is that federal law requires the lender to tell you both.

The APR is a tool for comparing different loans, which will include different interest rates but also different fees, points, and other terms. The APR is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates. The APR is not the same as your "Note Rate", or the actual interest rate you are being charged on the money you borrow. It is a little higher because it includes fees and other costs associated with your loan transaction. Use the APR shown on your Truth In Lending Statement (which is given to you when you obtain an application package) in conjunction with your Good Faith Estimate (the list of estimated fees and closing items, also found in your application package) to compare loan costs between Lenders. Then take into account the Loan Terms each Lender is offering (Note Rate, loan type, length of lock, pre-payment penalties, etc.) to help you make an informed decision about which loan is best for you. You may decide that the Loan Terms actually outweigh any difference found in APR's between Lenders. The APR is simply a tool for you, the borrower, to use to make an informed decision.

A little more info...

While it's designed to make it easier to compare loans, it's sometimes confusing because the APR includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the APR does not clearly define what goes into the calculation, APR's can vary from lender to lender and loan to loan.

The APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make -- that's why they're a variable rate in the first place!

So, APR's are at best inexact. The lesson is, that the APR can be a guide, but you need a mortgage professional to help you find the truly best loan for you.

Note when you're browsing for loan terms that the APR will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you'll see that APR's on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time.

Give us a call with your APR questions. Our mortgage professionals are here to help you.