What Is An (APR) Annual Percentage Rate

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Annual Percentage Rate (APR):

The Annual Percentage Rate (APR) is a government-mandated calculation that provides a theoretical retrospective view of the total payments a home buyer would incur over the entire term of their mortgage. It encompasses various elements such as mortgage interest, closing costs, insurance premiums, and other loan-related expenses.

The primary purpose of the APR calculation is to assist home buyers in comparing multiple mortgage options.

For instance, when a first-time home buyer is evaluating potential 30-year fixed-rate FHA mortgages and holds Loan Estimates from different lenders, selecting the mortgage with the lower APR typically represents the more favorable mortgage offer.

Nevertheless, there are specific situations in which relying solely on the APR may not be advisable. These situations include when the home buyer intends to sell the property, pay off the mortgage, or refinance it within the initial term of the loan, when considering an adjustable-rate mortgage, or when the mortgage requires private mortgage insurance.

In each of these scenarios, the retrospective nature of the APR calculation becomes speculative, rendering it an unreliable tool for making accurate mortgage comparisons.

Questions Home Buyers Ask About Annual Percentage Rate (APR)

How does APR distinguish itself from the mortgage interest rate?

The mortgage interest rate represents the cost of borrowing the principal amount. Conversely, the APR encompasses not only the mortgage interest rate but also any additional mortgage fees and loan costs. This comprehensive view of a mortgage's cost provides a more accurate assessment of its true financial implications.

Is it possible for the APR to change after I've secured a mortgage?

For fixed-rate mortgages, the Annual Percentage Rate remains consistent unless there is a requirement for mortgage insurance, in which case the amount can fluctuate based on the remaining principal and equity percentage. In contrast, with adjustable-rate mortgages, the APR changes whenever the loan's interest rate undergoes adjustments.

Does a mortgage with a lower APR always signify a superior option?

A lower APR occasionally suggests better loan terms. However, it's important to consider specific circumstances. For instance, a mortgage with multiple discount points may feature a low APR but come with exceedingly high closing costs. This may not align with your individual needs or budget.

Which types of fees are typically incorporated into the APR?

The mortgage APR calculation encompasses all fees associated with the mortgage, including loan origination fees, mortgage discount points, mortgage insurance premiums, and various mortgage-related closing costs. It's worth noting that the APR does not cover attorney's and title fees, or other expenses that would still apply if the buyer were to pay for the home in cash.

Additional Resources on Arm’s-Length Transaction

Additional Resources on Annual Percentage Rate (APR)

Related terms at LoveYourRate.com

• Discount points

• PITI

• Amortization