The Annual Percentage Rate (APR) is a calculation of the total cost of financing expressed as a percentage. Included in the calculation are the interest rate, any discount points (buy-down) you pay, any fees you pay either to the lender or to a third party as a requirement of the loan and any other costs established by law. Typically fees you pay are included in the APR calculation if the fee would not have been incurred had you paid cash for the home. Therefore the APR percentage will almost always be higher than your interest rate. However, the Annual Percentage Rate has no effect on the monthly payment you will make on your mortgage.
So why provide an APR? Great question. The Federal Truth-in-Lending law established this disclosure requirement in order to provide consumers, like yourself, a tool to compare the cost of lending between lenders. This way if two lenders are quoting the same rate, you should be able to tell which lender has the higher closing costs based on the APR. So if you shop around, don’t just ask for the interest rate, make sure you get the APR too.
If you have further questions, contact your Loan Officer today!