Home > Mortgages > 8 Key Facts About Your Mortgage APR

Comments 0 Comments

Securing a mortgage today requires careful consideration of all the figures associated with the transaction. The biggest figures most homebuyers pay attention to include loan amount, interest rate, closing costs and the one most benign to consumers, the annual percentage rate (APR for short), which is a disclosure item required in loan advertisements and loan disclosures.

Set forth by TILA (Truth In Lending Act) and overseen by the Fed, APR is touted as most accurate barometer to compare mortgage offers from one offer to another. In comparing mortgages, there is oftentimes inaccurate distinctions made with regard to disclosures between APR and interest rate, and what consumers are actually borrowing that creates confusion around the numbers. Here are some terms you need to understand to cut through the confusion.

Annual Percentage Rate (APR): A function of blending the closing costs associated with the loan transaction and re-amortizing that figure over the term of the loan.

Interest Rate: The actual interest rate tied to the amount of money being borrowed. Also called a “note rate,” it is what determines the amount of interest you’ll pay over the life of the loan on an amortization schedule.

The Facts About Mortgage Annual Percentage Rate

Fact: The annual percentage rate does not determine the monthly mortgage payment. The note rate is what determines the monthly mortgage payment.

Fact: Lenders must disclose the annual percentage rate on their loan disclosures after you submit a mortgage application.

Fact: The APR is usually within a .125% range above the note rate. This is positive because it indicates your closing costs are very small in relationship to the amount being borrowed and the interest rate (note rate) you are receiving.

Fact: If the APR is substantially over the .125% range above the note rate, this is an indicator of higher fees (closing costs) associated with the amount borrowed.

Fact: The APR is higher than the note rate because the APR takes into consideration a “blending” of the interest rate and closing costs over the life of the loan.

Fact: APR is not paid over the term of the loan — for example, 360 months representing a 30-year fixed rate mortgage. The note rate is the interest rate paid over the term of the loan.

Fact: The APR is a measuring tool used upfront to compare mortgage offers only, usually during the initial application process in comparing different loans.

Fact: APR represents the total cost picture in securing a mortgage, not the total interest paid over the life of the loan.

While APR is the standard used to compare mortgages, it is not the only way to compare mortgages. Rather than trying to figure out the intricacies of APR, consumers could also be served by comparing the following items to determine what mortgage choice is ideal.

These include:

  • Loan term
  • Interest rate
  • Closing costs
  • One loan term versus another
  • Closing costs recapture (determined by taking amount of closing costs divided by payment savings)

One last takeaway: The mortgage with the financing terms most consistent with your long-term goals and objectives is the ideal direction to take.

Image: iStockphoto

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team