WHY IS APR IMPORTANT?
APR stands for Annual Percentage Rate. It is the most widely used and most misunderstood number in the loan industry.
To ensure that borrowers are treated fairly the Federal Government through its agencies regulates loan rate quotations so borrowers are able to easily compare the "true" cost of mortgage loans.
Within three business days after receipt of an application, the lender is required to send both the Good Faith Estimate and Federal Truth In Lending disclosure statements to the borrower. This is known in the industry as Regulation Z. At the top of the Federal Truth In Lending form, you will see the Annual Percentage Rate (APR). At the top of the Good Faith Estimate you will see the note rate (this is the interest rate used to calculate your monthly payments).The APR will typically be higher than the note rate.
So why is the APR higher than the Note (or Interest) Rate?
The APR is the true cost of the loan. It includes the loan itself, plus other costs associated with the loan, such as origination fees, points, mortgage insurance premiums, appraisals, prepaid interest, and other items.
How should I compare two loans? Here's an example,let's assume that both loans are the same, except for the pricing:
Company A has a 30-year fixed rate for 7.50%.
Company B has a 30-year fixed rate for 7.00%.
Company B clearly has the cheapest loan at only 7.00%, right? Not necessarily. You must also compare their APRs, since the APR is the "true" loan cost. Let's compare again, this time with APRs included:
Company A has a 30-year fixed rate for 7.50%. APR 7.85
Company B has a 30-year fixed rate for 7.00%. APR 7.90%.
So the best deal is really Company A's 7.50% loan, because the APR–the "true" cost of the loan–is only 7.85%. Company B's true loan cost is slightly more expensive at 7.90% APR. It may not seem like much, but over the life of your loan it can mean thousands of wasted dollars.