Rates & APR

What is the difference between the interest rate and the A.P.R.?

For each mortgage loan you see advertised, there is an interest rate and an Annual Percentage Rate (A.P.R.) The easy answer to “why” is that federal law requires the lender to tell you both.

The A.P.R. is a tool for comparing different loans, which will include different interest rates but also different points and other terms. The A.P.R. is designed to represent the”true cost of a loan” to the borrower, expressed in the form of a yearly rate. This way, lenders cannot mislead borrowers with “hidden” fees and upfront costs behind low advertised rates.

While it is designed to make comparing different loans easier, it can seem confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.

The A.P.R. on a loan tied to a market index, like a 5/1 Adjustable Rate Mortgage(ARM), assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make –this is what makes them different from a traditional fixed-rate mortgage.

A.P.R.s are at best an inexact figure. They can provide an estimate as to the cost of your loan, but to understand all the details you need to consult an experienced mortgage professional.

When you are researching different loan terms, keep in mind that the A.P.R.will not disclose information about balloon payments or prepayment penalties,or the term of your rate lock period. Youmay also notice that A.P.R.s on 15-year loans carry a higher relative rate dueto the fact that points are amortized over a shorter period of time.