What Is an APR on Home Loans?
The APR, or annual percentage rate, on a home loan is the numerical representation of the combined monthly interest rate and all of the fees associated with the loan. All lenders are required to use the same calculations to determine this number.
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Significance
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Each mortgage lender is required by law to give a borrower a Truth in Lending Statement when they submit an application. This form shows the borrower the APR, which the borrower can use to accurately compare lenders to find the cheapest overall mortgage.
Function
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The APR is not just used for mortgages, but for all forms of lending, and in the instance of an adjustable rate mortgage or loan, it can vary from month to month or year to year. Each monthly loan statement should list the APR for the loan, if the rate is variable.
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Time Frame
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The APR calculates the interest and the fees associated with a full year of the mortgage, hence the word annual in the title.
Considerations
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When comparing lenders, the lender with the lowest APR has the lowest overall fees and interest rate, but may not have the lowest monthly interest rate. If the fees are high, especially in the event of an interest rate buy-down, the lower interest rate may not be beneficial to the borrower.
Misconceptions
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Many borrowers worry that the APR is a higher monthly interest rate than they locked in with their lender originally. While it does include the monthly interest rate in the calculation, it is not the same as the monthly interest rate. It will always be higher.
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References
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