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Why APR is Higher Than The Interest Rate

January 19, 2013 by Scott Sheldon

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The annual percentage rate is always higher than the actual interest rate, because the annual percentage rate takes into consideration all of the costs associated with financing including prepaid items such as property taxes, hazard insurance and mortgage interest lumps them all together against your loan and re-amortizes  the figures over the life of the loan e.g.  360 months. Because the annual percentage rate is a function of the closing costs, the APR will always be higher than the interest rate unless you are seeking a no cost loan. A no cost loan has the same interest rate, same APR, but no-cost loans cost more because the higher rate you’ll get from the lender offsets the closing costs recapture. Learn more about no-cost loans.

The  Annual percentage rate must be disclosed even on purchase transactions where the seller of the property is paying all of the closing costs. Lenders are under very constrictive regulations from the Fed which required them to send disclosures showing the higher APR than the interest rate even if there is no closing costs being paid by the borrower, the APR still needs to be transparent.

We advocate that  since the interest rate itself is against the amount of money your borrowing over the life of the loan, then the interest rate itself is a much better barometer of whether or not you’re getting a good deal than trying to compare annual percentage rates. The Fed in creating the annual percentage rate disclosure wanted to make mortgage rate comparison shopping easier, but the opposite is the case because its the  interest rate tied to the money being borrowed the creates the amount of interest paid over the life of the loan as well is what the monthly principal and interest payment is on a monthly basis.

 

Related Mortgage Advice from Scott Sheldon

  • Why is My Home Loan Rate 3.5%, but my APR is 3.793

    The difference in the interest rate and the annual percentage rate is the spread expressed…

  • Why Does Your Mortgage Loan Disclosures Show Higher Closing Costs?

    In most cases the closing costs are not actually higher, although they appear that way…

  • Lowest APR or Lowest Mortgage Rate?

    People purchasing and refinancing homes always are asking the question is it best to get…

  • Why Is My Mortgage Rate On My New Loan So High?

    In short risk-based pricing, the higher the risk the lender incurs the higher the mortgage…

Filed Under: Purchase Mortgage Loans Questions and Answers, Refinance Loans Questions and Answers Tagged With: 2013 Home Buying, home buying, home loan refinance, loan disclosures, Low Rates

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