What is an APR and What did it do to my Rate?

After discussing some options and various programs with your Loan Officer you reach a plan that works for your situation.  You are satisfied with your interest rate and then you are handed that one piece of paper that shows in large, bold-faced type a number that is not what you recall discussing and the words, “Annual Percentage Rate” next to it.  Where did this number come from?  Did my interest rate change?  What will this do to my payment?

If you know nothing else about home loans and borrowing money, you understand that there is a cost associated with the money you are borrowing, specifically your interest rate.  However when presented with a new percentage and the words Annual Percentage Rate (or APR) next to it, you are left with more questions than answers.  Let us explain.

The interest rate is the cost percentage used to calculate your monthly payment.  However, there are other fees and charges associated with the set-up and origination of a loan.  The APR takes these fees and charges into account and provides the consumer with an effective rate (or total cost) of their loan expressed as a percentage.  The intent of the APR is for consumers to be able to compare competing lenders and various loan programs.

Lenders are required by law to disclose the APR to the borrower within 3 days of applying for a mortgage loan. In late 2008 further regulations were passed (effective in 2010) stating that if the APR changed by more than .125% from this initial disclosure on the Good Faith Estimate (GFE), the lender must re-disclose this information to borrower and wait another three business days before closing the loan.

The APR does not change your interest rate; rather it clarifies the true cost of your loan.  It generally includes points, origination fees, mortgage insurance and document prep fees.  It is not however, how your payments are calculated.  Your payments are still based on the interest rate you discussed with your loan officer.  We hope this helps.

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