Everyone wants to know they’re getting a fair and reasonable mortgage offer. The federal government supports the annual percentage rate disclosure as the benchmark barometer of loan cost. Here are the facts…
Quick APR Tidbits
The annual percentage rate is a disclosure only seen in the origination of new credit or in advertisements of various credit products such as loans and credit cards. You will never see APR on a mortgage loan statement as the APR is used as a cost measure at application. APR is simply a function of the costs of the mortgage loan added to the interest rate and re-amortized based on the size of the loan you’re seeking over the loan term e.g. 360 months for a 30 year fixed rate mortgage. The sole purpose of the annual percentage rate disclosure is to make credit shopping easier.
- The APR does not change your loan amount.
- The APR does not change your payment.
- Your note rate is what determines your principal and interest mortgage payment.
Why APR Is Higher Than The Note Rate
The annual percentage rate is higher than the note rate because APR it takes into consideration the fees (whether or not you are actually paying them) adds them to your loan amount and re-calculates the figure over the loan term, thus the APR rate disclosure is higher. This rate vs. APR relationship can seem convoluted because you are not paying the fees based on the APR rate, but rather the note rate, as the note rate is the real cost of funds.
For example it is not uncommon to see a 30 year fixed rate mortgage with a note rate at 3.875%/APR 4.137%. The 26 basis points spread between the 4.137 and a 3.875% is the fees disclosed as expression of cost based on the size of a loan you are applying for.
APR can be best used to distinguish amongst mortgage offers in order of priority, starting with the highest APR offer, and working down.
Mortgage Tip: The APR disclosure fails to divulge total cost to the consumer. The total cost of the mortgage over time, is indeed a more accurate representation of true loan cost.
Consider this, a lower rate lower with a higher APR, may be a lower cost mortgage than a lower APR higher rate loan. How long you keep the mortgage plays a big role moving well beyond the APR disclosure.
Pay Close Attention To These Figures When Determining What Mortgage Offer Is Most Suitable:
- Loan term
- Loan Program
- Loan amount
- Note Rate
- Total payment
- Closing costs
Answer this: What is the net tangible benefit taking one loan vs. another? If you can answer that, the decision making will be easier. Remember relying on APR can only help with determining which mortgage offer has better terms and fees. The APR does not take into consideration what mortgage loan makes the most financial sense for you because it is not a driver of a payment change or a principal and interest payment or closing costs or nor does analyze cost-benefit amongst loan choices.
More Financial Tips Working With APR
*If you’re getting a no cost mortgage, where your lender is proving a credit to closing costs, the APR is calculated the same way as though you are paying the fees because your lender disclose appropriately to meet federal regulations in the origination of residential mortgage loans.
*If the APR is more than .25% higher than the note rate, pay closer attention. The majority of the time the mortgage has discount points associated with it, which is by far the biggest driver of higher APR. If you received disclosures that show a substantially higher APR than the interest rate and you don’t understand the disparity between the annual percentage rates on your disclosures and/or mortgage quotes ask your loan officer. Don’t be afraid to ask questions even if they seem silly or redundant.
As a well informed mortgage consumer, you have a duty to yourself to make certain you understand all of the many intricate facets of the mortgage loan you are seeking. Doing this discovery research upfront will you allow you to select which mortgage loan is most suitable for you.
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