Everyone wants to know they’re getting a fair and reasonable mortgage offer. The federal government supports the annual percentage rate disclosure as the benchmark barometer of loan cost.
Quick APR Facts
The annual percentage rate is a disclosure only seen in the origination of new credit or in advertisements of various credit products such as loans and credit cards. You will never see APR on a mortgage loan statement as the APR is used as a cost measure at application. APR is simply a function of the costs of the mortgage loan added to the interest rate and re-amortized based on the size of the loan you’re seeking over the loan term e.g. 360 months for a 30 year fixed rate mortgage. The sole purpose of the annual percentage rate disclosure is to make credit shopping easier.
- The APR does not change your loan amount.
- The APR does not change your payment.
- Your note rate is what determines your principal and interest mortgage payment.
Why APR Is Higher Than The Note Rate
The annual percentage rate is higher than the note rate because APR it takes into consideration the fees (whether or not you are actually paying them) adds them to your loan amount and re-calculates the figure over the loan term, thus the APR rate disclosure is higher. This rate vs. APR relationship can seem convoluted because you are not paying the fees based on the APR rate, but rather the note rate, as the note rate is the real cost of funds.
For example, it is not uncommon to see a 30-year fixed-rate mortgage with a note rate at 3.875%/APR 4.137%. The 26 basis points spread between the 4.137 and a 3.875% is the fees disclosed as expression of cost based on the size of a loan you are applying for.
APR can be best used to distinguish amongst mortgage offers in order of priority, starting with the highest APR offer, and working down.
Mortgage Tip: The APR disclosure fails to divulge total cost to the consumer. The total cost of the mortgage over time, is indeed a more accurate representation of true loan cost.
Cover Photo Courtesy of Wilson Hui