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Annual
Percentage Rate (APR)
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Annual Percentage Rate (APR)
is an interest
rate that is different from the note rate. It is
the equivalent interest rate considering all the added
cost to a given loan. Naturally, it is a function of
the loan amount, the interest rate, the total added
cost, and the terms. It is
commonly used to compare loan programs from
different lenders. The APR would equal the interest
rate if there is no additional cost to a given loan.
The APR is designed to measure the actual cost of a
loan. It prevents lenders from advertising a low rate
and hiding fees.
Example:
Total money
borrowed: (The actual amount
of money you are going to receive from the
lender.) = $200,000
Total extra
cost: (Points, application
fee, closing fee, title fee,...,
everything.) = $5,000
Interest rate: 7.5%
Term: 30 years
The Federal Truth in
Lending law requires mortgage companies to disclose
the APR when they advertise a rate. Typically the APR
is found next to the rate.
Example:
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30-year fixed
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8%
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1 point
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8.107% APR
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The APR doesn't affect
your monthly payments. Your monthly payments are a
function of the interest rate and the length of the
loan.
A loan with a lower APR
is not necessarily a better rate. Different
lenders calculate APRs differently! The best way to
compare loans is to ask lenders to provide you with a
good-faith estimate of their costs on program of your
requirement. Then delete all fees that are independent
of the loan. Now add up all the loan fees. The lender
that has lower loan fees has a cheaper loan than the
lender with higher loan fees.
APR's are very confusing
.The reason why APRs are confusing is because the
rules to compute APR are not clearly defined.
An APR does not tell you
how long your rate is locked for. A lender who offers
you a 10-day rate lock may have a lower APR
than a lender who offers you a 60-day rate lock!
Calculating APRs on adjustable
and balloon loans is even more complex
because future rates are unknown. The result is even
more confusion about how lenders calculate APRs.
Do not attempt to compare
a 30-year loan with a 15-year loan using their
respective APRs. A 15-year loan may have a lower
interest rate, but could have a higher APR, since the
loan fees are amortized over a shorter period of time.
Conclusion :
Use the APR as a starting point to compare loans. The
APR is a result of a complex calculation and not
clearly defined. There is no substitute to getting a
good-faith estimate from each lender to compare costs.
Remember to exclude those costs that are independent
of the loan.
Fees Included or
Excluded in APR's
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