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.