If you’re shopping for a home loan or even a refinance you may have heard the term APR, which stands for annual percentage rate. The annual percentage rate represents the true cost of the home loan. This includes the mortgage fees amortized over the life of the loan. This APR was actually created to allow homebuyers the opportunity to compare different rates from different mortgage companies. What is APR?
The APR is the broader measurement of the cost of the loan itself. It reflects not only the interest rate but points, fees, and other charges required to purchase the loan. This is why the APR is usually higher than your interest rate. Any time you apply for a loan the lender or mortgage officer will send you a good faith estimate as well as the truth in lending statement. This document will include the estimated fees, the promissory note and the APR. This APR is based on a formula determined by the government. This truth in lending document requires lenders to reveal the APR at closing. This is an artificial measurement of the relative cost of the loan transaction and may not actually have a bearing on the actual interest of a particular loan. However, the APR does take the interest rate into account and the APR will always be higher than the interest rate you were originally quoted.
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For adjustable-rate loans, the APR does not reflect the maximum interest rate of the loan. Home loan shoppers should because just when comparing the APR is a fixed rate loans with adjustable rate loans. Don’t look to the APR on loan when determining which alone makes the most sense for you.
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