What is the Annual Percentage Rate (APR)?
While considering a mortgage, there are many kinds of payments and costs, as well as definitions & terms, for you to review and be aware of. One such term is the Annual Percentage Rate or APR.
APR refers to the total costs associated with a mortgage loan for one year of borrowing. This includes interest payments, closing costs, and other associated fees that you accumulate with a mortgage over the course of a year. Another cost included in APR is origination fees, which includes fees for applying, processing, and underwriting. Lenders and other financial institutions are required to release APRs to borrowers because of the Truth in Lending Act (TILA) of 1968.
APR vs. Interest Rates
APR compiles multiple factors into one metric, represented as a percentage rate of interest. An interest rate is but one aspect of a mortgage loan, and it is also one of the factors rolled into the calculation of APR (as yearly interest costs). By nature of being a combined metric, APR is typically higher than the regular monthly interest rate.
APR Drawbacks
APR can vary from lender to lender, as each lender tends to use its own fee structures. Additionally, when APR is calculated it is assumed that the mortgage will be paid off in full and on time. If you are planning on moving soon after purchasing the home or even refinancing, using APR to compare different loan offers may be unhelpful. APR also doesn’t help you compare mortgages with an adjustable-rate (ARM), as it is calculated assuming a fixed-rate mortgage.
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