By John R. Rapasky
In every residential loan transaction, the Truth-In-Lending disclosure form contains the Annual Percentage Rate (known as APR). Often, this rate is different than the interest rate on the loan. I often get asked why this is, and what is the real rate on my loan? This blog article explains APR, and why it is important to you in evaluating a loan.
The APR discloses the cost of credit. The APR is calculated by taking into consideration the finance costs of the loan, and disclosing those costs in terms of the interest rate. The APR is usually different than the note rate on the loan.
Often, on a 30-year fixed mortgage, the APR is higher than the note rate. This is due to the costs of the loan. Typical costs that affect the APR are underwriting, processing, origination, discount, escrow, and prepaid interest. Be careful, a simple comparison of APRs will not tell you what product has the lowest rate and costs. There are other costs to the loan transaction that do not impact the APR, such as appraisal fee, credit report fee, title insurance, and recording fees. Thus, a review of the APR by itself may not give you the lowest rate and costs on a loan.
On adjustable rate mortgages, the APR could be misleading. For example, if the loan is a 5/1 ARM, the rate is fixed for 5 years, and is then adjustable for the remaining 25 years of the loan. The rate during the 25-year adjustment period is based on an index, such as the one-year treasury index or the one-year LIBOR, plus a margin. The index can vary from year to year, but the margin is the same for the remaining 25 years. If the rate during the adjustment period is less than the note rate, the APR will likely be lower than the note rate. Therefore, a review of the APR on adjustable rate mortgages may be misleading when determining the lowest rate and costs on a loan.
In sum, APR can be helpful when comparing the rate and costs of various loan programs. However, it is only one factor to consider when evaluating a loan. Feel free to contact us if you have any questions regarding APR and selecting your loan.
John Rapasky is the President of the Counsel Mortgage Group, LLC. You can learn about them atwww.counselmortgage.com. Copyright © 2010 Counsel Mortgage Group®, LLC
MB# 0909580 NMLS# 178927 AZ LO# 0911590 NMLS LO# 179539