What is the APR and how is it calculated?
APR stands for annual percentage rate and its purpose is to give borrowers a truer representation of the effective interest rate on their loan. APR factors in certain closing costs and fees and spreads these costs over the life of the loan, along with the note rate, to arrive at a more accurate annualized percentage rate than the note rate alone represents.
Annual Percentage Rate (APR) The APR is not the note rate. The Annual Percentage Rate (APR) reflects, as a percentage, the total cost of the loan – the interest charged is only one of those costs. Some of the other costs included in the APR are: • Private Mortgage Insurance • FHA mortgage insurance premium (when applicable) • Prepaid finance charges (loan discounts, origination fees, prepaid interest and other credit costs.) The APR is calculated by spreading those charges over the life of the loan. The result is that the APR rate is higher that just the interest rate shown on your Mortgage Note or Deed of Trust . If the interest were the only finance charge, then the interest rate and the annual percentage rate would be the same. Prepaid Finance Charges Prepaid finance charges are a class of costs charged in connection with the loan which must be paid upon the close of the loan. These charges are defined by the Federal Reserve Board in the Regulation Z. Those charges must be paid by t
