Buyers are often confused about the difference between the Interest Rate and the Annual Percentage Rate (APR).
The interest rate is a percentage of the principal loan amount, and reflects the base cost of borrowing the money.
The Annual Percentage Rate (APR) takes the base interest rate and adds to it the additional costs to get the loan.
What are these additional costs?
And, why is it important and useful for the buyer to know and understand the APR?
The APR generally includes discount and origination points, prepaid interest, administrative fee, loan processing fee, underwriting fee, private mortgage insurance premium, and the escrow/settlement fee. The loan application fee and credit life insurance, which pays off the mortgage in the event of a borrower's death, may also be included in the APR.
Title, attorney and notary fees, as well as home inspection, recording fees, transfer taxes, credit report and home appraisal are generally NOT included in the APR.
The APR rate reflects the true cost of a loan and gives borrowers a way to compare lenders using both the interest rate and fee structure to see which loan is more expensive. Closing costs can differ widely across lenders, so one lender may offer a lower interest rate but have a higher APR because of higher closing costs.