What is APR, and how is it calculated?
The annual percentage rate is a calculated rate of interest for a loan over its projected life. This rate includes the interest, all points (which are considered prepaid interest), mortgage insurance, and other charges associated with making the loan that the lender collects from the borrower. The APR is calculated by a standard formula that all lenders use. This enables the borrower to comparison shop between lenders and/or loan products.
It is required by federal law to disclose The Annual Percentage Rate (APR) for all consumer credit including residential mortgage loans. The APR can be very confusing to the typical borrower. The federal truth-in-lending laws govern the APR. It is important to understand that lenders can “manipulate” the APR by categorizing closing expenses, and using different names to mean the same thing . . . If you thought the last sentence didn’t make sense — read on: Lets consider two lenders who charge 8 percent in interest on a $100,000 mortgage loan. Lender “X” also charges 3 points but does not charge the borrower any additional fees for taking the mortgage application. Additionally there are no appraisal fees, credit report fees and the like. Lender “W” only charges the borrower 2 points, but additionally charges $1,000 to cover the application fee, appraisal cost, credit report, and the like. Based on this example, the borrower’s expenses are identical with these two lenders: that is 3 poi
APR stands for the Annual Percentage Rate and is a tool used to provide a standard of comparison for loans offered by competing lenders. APR takes into account the loan’s interest rate, closing costs, and other fees such as points. An APR lets you see the total cost of a loan, including fees and points over the life of the loan, not just the interest due.
