Mortgages: What Consumers Need To Know About The Annual Percentage Rate

Securing a mortgage today requires careful consideration of all the figures. Biggest numbers most consumers pay attention to include loan amount, interest rate, closing costs and the most scrutinized, the annual percentage rate. APR for short, is a disclosure item required loan advertisements and at loan application. Set forth by TILA (Truth In Lending) and overseen by the Fed, APR is touted as most accurate barometer to compare mortgages. In comparing offers, there is often times false distinctions made between APR and interest rate that can creates clout around the financing terms.

Quick Finance Terms To Understand:

Annual Percentage Rate (APR): is a function of blending the closing costs associated with the loan transaction and re-amortizing that figure over the term of the loan.

Interest Rate: is the actual interest rate tied to the amount of money being borrowed. Also called a “note rate”,  it is what determines the amount of interest you’ll pay over the life of the loan on an amortization schedule.

Facts About Mortgage Annual Percentage Rate

Fact: The annual percentage rate does not determine the mortgage payment. This is determined by the note rate.

Fact: Lenders must disclose the annual percentage rate on their loan disclosures within three days after submitting a mortgage application.

Fact: The APR is usually within a .125% range above the note rate. This is positive because it is an indicator your closing costs are very small in relationship to the amount being borrowed and the interest rate (note rate) you are receiving.

Fact: If the APR is substantially over the .125%  range above the note rate, this is an indicator of higher fees (closing costs) associated with amount borrowed.

Fact: The APR is higher than the note rate because the APR takes into consideration an averaging of the interest rate and closing costs over the loan life.

Fact: APR is not paid over the term of the loan (e.g.  360 months representing a 30 year fixed rate mortgage), the note rate is the interest rate paid over the term of the loan.

Fact: After the mortgage is consummated, the APR is not any monthly mortgage statement nor on the actual note between you and your mortgage lender.

Fact: APR represents the total cost picture in securing a mortgage, not the total interest paid over the life of the loan.

 

While APR is the standard mortgage comparison disclosure, it is not the only way to compare quotes.

Consumers rather than trying to figure out the intricacies of APR, could be better served by comparing the following items to determine what mortgage choice is most appropriate for their situation.

These include:

  • Loan term
  • Interest rate
  • Closing costs
  • One loan term versus another
  • Closing  costs recapture (determined by taking amount of closing costs divided by payment savings)

*Financing Tip: the mortgage with the financing terms most consistent with your long-term goals and objectives is the ideal direction to take.

If you would like to compare mortgage offers, or have a general question about the annual percentage rate, contact Scott.Sheldon@nafinc.com. You can also receive a complementary, no obligation mortgage rate quote for your next home loan.

 

 

 

 

 

 

Posted in:

RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

Real estate investor reviewing DSCR loan documents at a desk with a laptop and house model.

Outside-the-Box Mortgage Solutions: DSCR, Bank Statement, and Non-QM Loans Explained

Not every borrower fits neatly into a conventional mortgage box. In fact, as homeownership has…

Infographic titled "Appraisal Risks in Refinancing" showing four people discussing refinancing. It highlights appraisal risk factors, mitigation strategies, and alternatives like HELOCs and second mortgages, using a clean layout with navy text on a beige background.

Worried About a Low Appraisal? Here’s What You Need to Know Before Refinancing

In the current real estate market, homeowners considering refinancing are increasingly concerned about the implications…

hat Happens If Fannie and Freddie Go Private?” with two stylized house icons, a padlock, a bar chart, and a dollar sign, symbolizing housing market uncertainty and financial impact

What Happens If Fannie and Freddie Go Private?

What Happens If Fannie Mae and Freddie Mac Go Private? The housing market as we…

A wallet containing colorful credit cards with a bold text overlay reading "Refinancing Strategies to Reduce Credit Card Debt and Buy a Home – Refinance" against a blue background.

Refinancing Strategies to Reduce Credit Card Debt and Buy a Home

Refinancing Strategies to Reduce Credit Card Debt and Buy a Home If you’re sitting on…

View More from The Mortgage Files:

begin your mortgage journey with sonoma county mortgages

Let us make your mortgage experience easy. Trust our expertise to get you your best mortgage rate. Click below to start turning your home dreams into reality today!