What Is All This Talk About APR

What is all this talk about APR? You see the letters everywhere when you are looking at a lender and their mortgage rates. You know the realtor explained it and so did the lender at closing, but do you really understand it?”

There can be many costs associated with taking out a mortgage. These include:

  • The interest rate
  • Points
  • Fees
  • Other charges

Interest rate

The interest rate is the cost of borrowing the principal loan amount. It can be variable or fixed, but it’s always expressed as a percentage.

Annual percentage rate (APR)

The APR is a broader measure of the cost of your mortgage because it reflects the interest rate as well as other costs such as broker fees, discount points and some closing costs. The APR is also expressed as a percentage.

Under the Truth in Lending Act, lenders are required to disclose the APR to borrowers.

“The main difference is that the interest rate calculates what your actual monthly payment will be,” says Sean O. McGeehan, a loan officer in Homer Glen, Illinois. “The APR calculates the total cost of the loan. A consumer can use one or both to make apples-to-apples comparisons when shopping for loans.”

Here’s an example of two lenders in Los Angeles, their mortgage interest rate, and APR.

30 Year Fixed Jumbo – Los Angeles
Lender Date Rate APR* Fees Points Lock Monthly($)
Bank of America 11/24/15 3.625 3.676 $1,501 0.383/
45 $2,853
Sebonic Financial 11/24/15 3.625 3.854 $4,795 2.000/
45 $2,853

Points may be a part of the negotiation for a lower rate. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time. Points are calculated in relation to the loan amount. Each point equals one percent of the loan amount. For example, one point on a $100,000 loan would be one percent of the loan amount, or $1,000. Two points would be two percent of the loan amount, or $2,000. Points are a fee that affects your APR.

The two charts are of two lenders in Los Angeles on the same day. Not only can we compare the interest rates on various loan types, but we can compare APR. When comparing the 30-year fixed we see a slight difference and that difference reflects closing costs and other fees.

Here’s the tricky part. The APR is based on staying with that loan for the entire term of the loan. Gloria Shulman, founder of Centek Capital Group in Beverly Hills, California writes, “The key for looking at APR, as it is for many loan decisions, is time horizon. It’s the most important question borrowers need to ask themselves before looking for a home and the mortgage that best fits their current and projected financial and family situations.”

Tip from CFPB: Take care when comparing the APRs of adjustable-rate loans. For adjustable rate loans, the APR does not reflect the maximum interest rate of the loan. Be careful when comparing the APRs of fixed-rate loans with adjustable-rate loans, or among different adjustable-rate loans. Don’t look at the APR alone in determining what loan makes the most sense for your circumstances.

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