What Is an APR and How Does It Affect Current Mortgage Rates?

by Joe Taylor Jr.
CMR Columnist

The Federal Truth in Lending Act, Regulation Z, requires lenders to express the year-to-year costs of a mortgage as an Annual Percentage Rate or APR. When you want to compare mortgage rates, the APR gives you the easiest way to reliably compare deals that lenders want to make with you.

What Your APR Includes

APR sums up the current mortgage rate along with many additional charges, including:
  • origination fees
  • points
  • buy-down funds
  • prepaid mortgage interest
  • mortgage insurance premiums
  • tax service
  • underwriting

An APR Example

Mr. and Mrs. Borrower decide to buy a $100,000 home. Lender A's current mortgage rate is 5.5%, with 5% points and 5% fees. On the other hand, Lender B quotes a 5.7% interest rate with no points and additional fees. At first glance, Lender A might appear to offer the better mortgage deal.

However, the best way to compare mortgage rates on both of these deals is to take a look at the APR's. When factoring in additional costs, Lender A's APR works out to be 5.97%. With no add-ons, Lender B's APR remains at 5.7%. Understanding the difference between an APR and a promotional teaser rate could save you thousands of dollars in interest over the life of your home loan.

When shopping for your home loan, make sure you ask your prospective lender whether the current mortgage rate they quote you is their baseline rate or whether they have quoted you the actual APR.

Sources
Bankrate.com
California Bank Trust

About the Author
Joe Taylor Jr. coaches beginning mortgage brokers on providing better customer service and to understanding creative financing opportunities.

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