A Why you need to understand APR (Annual Percentage Rate)
By mortgage writer: Dave Leonhart

Have you ever wondered how on earth you can compare two (or more) loans and make an honest ‘apples-to-apples’ comparison between them? Well, the answer lies in APR which is an acronym for Annual Percentage Rate.

When you apply for a mortgage or loan, the lender is required to tell you the interest rate and the annual percentage rate (APR). This is a federal regulation that was created to allow consumers the ability to shop and compare different types of loans using a single measure, or common denominator, if you will.

Since all loans offer different interest rates, fees, and terms, the APR combines all of the mortgage’s components and boils it down to one simple number, regardless of how different each loan may be. For example, you can compare a fixed rate to an ARM (adjustable rate mortgage), or you can compare the exact same loan, from various lenders.

Here’s a real life example. Let’s assume there are two lenders, Lender #1 and Lender #2. They are both offering a 30-year fixed rate mortgage for $150,000:

 
  Lender #1 offers you a 6.5 percent with no points and $5,000 in fees
   
  Lender #2 offers you 6.25 percent with 1 point (or $1,500) and $5,500 in fees, for a total of $7,000 in points and fees.

Lender #2 has the lower interest rate, but $2,000 more closing costs. So, which loan is the better deal?

Lender #1’s APR is 6.83%, while Lender #2’s APR is 6.71%. Since Lender #2 has the lower APR, that loan is a better deal, over the long run. Meaning, if you’re planning on keeping the loan for a long time, it will be cheaper to have loan #2.

But, if you’re planning on keeping the loan for only a short time, or you are a little short on cash right now, Lender #1 might be better. Here’s why:

Lender #2 is asking for $2,000 additional dollars to close their loan which if you are using this loan to purchase a home, you must pay this additional amount upfront. And, if you pay this amount upfront, it leaves you with less money to put elsewhere such as, furniture.

If you want to compare the lowest lenders rates and APR’s look here for rates nationwide, or search locally in your home town.

Bottom line, if you’re planning on staying in the home for the length of the loan term, only consider the APR and don’t even look at the quoted interest rate (or nominal rate).

One last note— the APR is estimated by the lender, but should be within 1/8th of a percent.