Why is the annual percentage rate (APR) higher than the interest rate?
The Annual Percentage Rate (APR) is the cost of credit expressed as an annual rate. Because you may be paying discount “points” and other “prepaid” finance charges at closing, the APR disclosed is often higher than the interest rate on your loan. This APR can be compared to the APR on other loan programs to give you a consistent means of comparing rates and programs. The APR is computed from the amount financed and based on what your proposed payments will be on the actual loan amount credited to you at settlement. On a $100,000 loan with $3,000 Prepaid Charges, a 30 year term and a fixed interest rate of 7%, the payment would be $665.30 (principal & interest). Since the APR is based on the amount financed ($97,000) while the payment is based on the actual loan amount given ($100,000) the APR (7.304%) is higher than the actual interest rate. The APR is also increased if the loan has Private Mortgage Insurance (PMI). PMI is required on most loans that exceed 80% of the value of the hous
