How is an APR determined?
The concept of the annual percentage rate can be difficult to understand because it is based on a complex mathematical formula, which is prescribed in Regulation Z. What is important to understand though is that the APR is a measure of the cost of credit expressed as a yearly rate. The APR reflects the amount being financed, the interest rate, the timing of the payments, and any other costs (prepaid charges) required as a condition of the mortgage loan that make up the finance charge. The finance charge, another required disclosure under the Truth in Lending Act, expresses as a dollar amount the costs associated with the loan, including interest and charges payable by the borrower such as points, loan fees, origination fees, application fees, and insurance, to name a few.
