Indianapolis Area Real Estate Blog

Simple Real Estate Definitions : APR

APR is an acronym for Annual Percentage Rate.  It's a government-mandated calculation meant to simplify the comparison of mortgage options.

A loan's APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure.

Because APR is expressed as a percentage, many people confuse it for the loan's interest rate.  It's not. APR represents the total cost of borrowing over the life of a loan.  'Interest rate' is the basis for monthly mortgage repayments.

The main advantage of APR is that it allows an 'apples-to-apples' comparison between loan products.

As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees.  In this sense, APR can help a borrower determine which loan is least costly long-term.

However, APR is not without its shortcomings.

First, different banks includes different fees into their APR calculations.  By definition, this spoils APR as a choose-between-lenders, apples-to-apples comparison method.

And, second, when calculating APR, 'life of the loan' is assumed to be full-term.  When a 30-year mortgage pays off in 7 years or fewer -- as most of them do -- APR comparisons are rendered moot.

In other words, APR is just one metric to compare mortgages -- it's not the only metric.  The best way to compare your mortgage options is to review all the loan terms together and determine which is most suitable.


#1 By Jeremiah Wean at 12/1/2009 3:41 PM

Paula, very good straight forward explanation. The only thing I'd add would be the comparison gets completely out of whack when comparing an Adjustable Rate Mortgage to a Fixed Rate Mortgage.

I'm glad that you pointed out that not all banks include the same items as pre-paid making the comparision not so easy.

#2 By UK Pubs for Sale at 12/2/2009 2:22 AM

Excellent explanation- I am saving it to use again, because we often end up in a 'confused smile and nod' situation when this is brought up...and its brought up a lot

#3 By Real Estate Investment Approach at 12/26/2009 2:30 PM

A most confusing real estate definition with a nicely simplified consumer explanation! 100% spot on for buyers/investors to not use a singular metric when shopping for mortgages such as APR.

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