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APR vs. Interest Rate

APR vs. Interest Rate, what’s the difference?

Why is the Annual Percentage Rate (APR) different than the note rate or interest rate?

This is one of the commonly asked questions in our industry.   It’s very confusing especially for first time homebuyers.

The APR was designed to give the consumer a uniform way of comparing mortgage loans using a measurement that would represent the total cost, as expressed in an interest rate, of the loan.  The APR is required by Federal Law to be shown next to the note rate on all advertising material distributed to the consumer.

However, one of the challenges in using only the APR to compare loans is that there is a large variance between lenders as to what fees they do or do not include in that APR rate, therefore, it is advised to use another, more accurate, method to compare options as follows.

Key Points of Mortgage Price Comparison

  • Points (where applicable)
  • Lender and/or Broker processing fee (over and above points)
  • Third party fees (Escrow, Property Taxes, Credit report fee, Appraisal fee)
  • Payment
  • Impact on pricing to buy out Impounds
  • Lock term
  • Prepayment penalty
  • Loan Program
  • Cash out ( higher rate) or Rate and term
  • Owner Occupied, Second Home or Investment property loan (higher rate)
  • Loan Balance before and after the proposed loan goes through

There are a number of forms that are required to be used in the industry to disclose the foregoing, such as the Good Faith Estimate.  However, those are normally only generated after you have done a loan application.

In order to shop effectively before you submit a loan you will need to ask each Lender the Key point questions and compare them side by side.  After that time you will you be able to make an educated decision and be able to move forward with the best option.

Quick Tip:  Ask your loan professional to explain in detail the difference in your loan balance from what it was before as compared to what it would be after the proposed loan goes through.  This will help you verify the proposed points and fees are what was quoted and give you a better understanding of how it impacts your loan balance.

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