What is the difference between an Interest Rate and an APR?
In the U.S., the calculation and disclosure of APR is governed by the Truth in Lending Act (which is implemented by the Consumer Financial Protection Bureau (CFPB) in Regulation Z of the Act). In general, APR in the United States is expressed as the periodic (monthly) interest rate times the number of compounding periods in a year. Since the APR must include certain non-interest charges and fees, it requires a more detailed calculation. The APR must be disclosed to the borrower within 3 days of applying for a mortgage and this information is typically emailed to the borrower. The APR is found on the truth in lending disclosure statement.
Annual percentage rate, or APR, is an attempt to accurately reflect the true cost of borrowing. Mortgage APR includes the interest rate, points and fees charged by the lender, as well as a few escrow and title fees, but not all. APR is higher than the interest rate because it encompasses all these loan costs, including the interest expense.
Most important in regard to this disclosure of APR, is the fact that not all charges to a transaction are labelled as APR fees (the appraisal fee, for instance, is not an APR charge) – which are the only fees used in calculating APR. Further, make sure that if you are comparing mortgage pricing, that you compare mortgages of the same type and term, as well as the same day to ensure it’s an apples-to-apples comparison (pricing changes daily – and multiple times per day).
Therefore, when shopping, ask a mortgage lender for total closing costs (including all APR and non-APR charges), in order to understand true lending cost.
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- Can I apply before I find a property and get pre-approved?
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- Is paying off an existing second mortgage or home equity line considered cash out?
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- What is an ARM?
- What is a subordination agreement?
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- What is prepaid interest?
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- Are any fees collected when I lock?
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