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What Is Annual Percentage Rate (APR)?
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. 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:
30 year fixed 8% 1 point 8.107% APR
The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.
The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan". It creates a level playing field of lenders. It prevents lenders from advertising a low rate and hiding fees.
If life were easy, all you would have to do is compare APRs from the lender/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong!
Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in our opinion is to ask lenders to provide you with a good-faith-estimate of their costs on the same type of program (e.g. 30 year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as title insurance fees, attorney/closing fees, recording fees, etc. Now add up all the remaining loan fees. The lender that has the lower loan fees has a cheaper loan than the lender with the higher fees.
The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
What fees are included in the APR? The following fees ARE generally included in the APR:
* Points - both discount and origination points
* Pre-paid Interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies may use numbers between 1 and 30!
* Loan processing fee
* Underwriting fee
* Document preparation fee
* Private mortgage insurance
* Appraisal fee
* Credit report fee
The following fees are normally NOT included in the APR:
* Title and abstract fee
* Escrow fee
* Home Inspection fee
* Recording fee
* Transfer taxes
An APR does no 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!
Finally, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!
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 the costs independent of the loan.
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"With all the different loans programs available I didn't know the best program for me. With the help of my Grand Oak Mortgage Company Loan Officer I ended up with a loan program that saved me nearly $100/month on my house payment" - Mr. & Mrs. Wink
"The staff went up and above any of our expectations. Explaining everything step by step, very professional and helpful" - Dale Gohn & Kristie Tickle
"As a first time home buyer I was very unclear on what was involved in applying for a mortgage and what points and closing costs really were. Grand Oak Mortgage Company took the time to explain and educate me and my wife on the entire mortgage process" - Mr. & Mrs. Zlotnik
"Thank You Grand Oak Mortgage, my loan experience was all that you said it would be, fast and hassle-free" - Mr. & Mrs. Babcock
"Grand Oak Mortgage was great to deal with. Everytime, I spoke with them they were very upbeat and happy. It was a real pleasure dealing with such a great staff. They were very patient with me even when they had to explain things to me twice" - Mr. Passalacqua
"My Loan Officer was very helpful and all for us, she gave us insight into the ins and outs of the business" - Mr. & Mrs. Gonzalez
"Grand Oak Mortgage was very helpful, we want to thank them for getting us in our house. Very good company, who cares about their clients" - Mr. Zak
"With all the different loans programs available I didn't know the best program for me. With the help of my Grand Oak Mortgage Company Loan Officer I ended up with a loan program that saved me nearly $100/month on my house payment" - Mr. & Mrs. Wink
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