by Olan Carder
What is an APR and why is different from my interest rate?
Most homebuyers get very confused when they first see their APR. Their loan officer told them that the interest rate is 6.25%, but they see the APR is 6.456%. What is going on?
Before understanding the APR, you need to know its purpose. The APR was invented to help consumers shop and compare mortgage loans. If one lender quotes you 6% with no points but the other lender quotes you 5.75% with one point, which one is better? The APR enables you to easily compare 2 loans because it shows you the interest rate you are paying and the fees you are paying to get that rate spread out over the term of the loan.
In theory, it should be a true apples to apples comparison of two loan quotes. Since the APR shows your interest rate and the fees you are paying for that rate, it should normally be higher than your actual rate. The test is how much higher.
There are 2 problems:
Problem #1 with comparing loans with the APR… each loan officer’s computer has to be setup properly to include the correct fees into that number. That leaves it open to human tampering. Far be it from me to hint that some loan officers would willingly print a false APR to win a loan, but even an honest loan officer might make a mistake. That’s why you should compare the APR, but also compare the Good Faith Estimate line for line and make sure you are getting the best deal.
Problem #2 with comparing loans with the APR… the comparison only works if you keep the loan for the entire term. If you get a 30 year loan but only keep it 6 years, the comparison might not be correct. The APR shows you which loan costs less over 30 years not 6 years. That’s why I offer a “Total Cost Analysis” to my clients that calculates the total cost for period of time they plan to keep the mortgage. That is the best way to compare loan programs.
For more information about this or other loan topics, email me at firstname.lastname@example.org.
Why is th APR different from my interest rate?
by Olan Carder
Leave a Reply
So everybody’s heard that Atlanta calls itself the “capitol” of the New South. Ok, I’ll give them that. But if Atlanta is the “capitol”, then Charlotte is the heart of the New South. Charlotte is the 20th largest city …
Welcome To CCO
Sign up for our Newsletter
All information is secure, private and never shared with third parties.