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.
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.
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
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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