What Is APR?


APR: The Need-To-Knows

You’ve most likely heard the term before. Car commercials use it nonstop in an effort to sell you on leasing or buying a shiny new set of wheels. But the annual percentage rate, or APR, doesn’t only describe how much you pay for your car; it also describes how much extra you’ll be paying on your mortgage.

Needless to say, knowing what APR is and what it includes is vital to calculating how much you’ll owe on your home. Here is the essential information on APRs.

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What Is Included In APR?

APR not only includes the interest rate you will be paying on your loan. It also includes:

  • Points
  • Mortgage broker fees
  • Mortgage insurance
  • Prepaid interest
  • Various charges you’ll have to pay to get the loan

Essentially, APR shows the borrower the “real” cost of the loan. This number will be included in your Good Faith Estimate (GFE) after the lender accepts the mortgage application. This should be located at the top of the GFE, along with the rate used to calculate your monthly principal and interest payments.

Why Do I Need To Know My APR?

By law, companies are required to show their APR to customers because it is different from the interest rate they were quoted, more often than not. Lenders show their APRs in a GFE so that potential borrowers can compare the APRs they were offered. That way, borrowers can make an informed decision on their lenders, and know exactly what they are getting into.

How Does An APR Affect ARMs?

If you are considering getting an adjustable rate mortgage (ARM), then be incredibly careful. The quoted APR on your GFE might not reflect the highest interest rate on your loan, meaning that you may have to pay more in a given month. It should also go without saying that comparing the APRs of a fixed and adjustable rate loan is not advisable because the ARM can fluctuate. When comparing the benefits and drawbacks of each, look at more than simply the APR.

SEE ALSO: Everything You Need To Know About Shopping For A Mortgage Loan

While APR isn’t the only factor that should go into your loan decision process, it is certainly an important part of that decision. Once you fully understand what APR is and how it affects your mortgage, you can make a more informed decision on your mortgage.

Date of original publication:
Updated on: October 27, 2016

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