Ryan’s Mortgage Blog:
The Annual Percentage Rate (APR) is different from the Interest Rate of the loan. The APR is used to determine the true cost of the loan. Basically, the APR takes into consideration the interest rate plus closing costs which determines the “value” of the loan. The Federal Truth in Lending law requires companies to state the APR for programs they advertise which should help consumers compare offers from different companies. This is supposed to prevent lenders from hiding fees. Not only can the APR be confusing to understand, it confusing to create. There is actually no clear rule how to calculate the figure. APRs may be calculated differently from company to company depending on which fees and charges they include in the calculation. The APR is supposed to be helpful for the consumer to determine the “value” of the loan but should not be the end all way to determine which loan to choose. I feel looking at the Good Faith Estimate is a much better way to compare loans. APRs do not include anything about prepayment penalties, rate locks, and balloon payments.
The APR does not affect monthly payments. Monthly payments are based off of the interest rate and the length of the loan. The APR quoted by a company (if calculated properly) should give you a good insight whether there are a lot of fees and charges. Here is an example. Company A quotes an interest rate of 6.0% for 30 years as does Company B. Company A quotes the same loan at an APR of 6.5%, and Company B quotes an APR at 8%. There is a 1.5% difference in APR, but no difference in the interest rate. This means company B is charging a considerable amount more in fees and charges (closing costs) for the same loan. My advice would be to ask company B to explain why their APR is so high, and see if you can get a good faith estimate. Just based on this scenario company A looks to have a much better deal, BUT there are still other variables. Maybe company A has a prepayment penalty on the loan and company B doesn’t. Maybe company A didn’t include some closing costs into their APR calculation, which sounds illegal but really isn’t since there is no set law that I am aware of that mandates how you “officially” calculate the APR. There are industry standards that companies should be following but let’s be honest here, most mortgage companies aren’t known for their honesty. I am lucky to say I am with one of the companies that stand by their word and can deliver quality products and services and that do not hide anything. Sorry, I had to plug that for a second because I am proud of my new company, Peregrine Lending Company.
Hopefully this helped you better understand what the APR is and how to understand it. If you have any questions or comments you can reach me at: RBaker@PeregrineLending.com or 805-540-0866.