It would seem like the terms "APR" and "Interest Rate" would be fully understood by now. However, as much as I seek out what the differences are, I only end up with more questions.
1.) Why is it that APR is considered an apples-to-apples comparison between home loan and mortgage refinance lenders, when the interest rate is what you will be making monthly payments on?
2.) Why is it that the APR is generally higher than the home mortgage rate you were quoted?
confusing. Many people need help here. The nominal home mortgage rate or mortgage refinance rate is the interest rate used when calculating the interest expense on your home loan. That's what most people consider to be the interest rate on their home loan. The annual percentage rate (APR) on a house loan includes some of the costs involved in procuring the loan, i.e. points, fees, appraisal and so on, and is meant to provide the consumer with an effective rate to use when comparing home loans and mortgage refinancing.
a yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans. In mortgages, it is the interest rate of a mortgage when taking into account the interest, mortgage insurance, and certain closing costs including points paid at closing.
Act is implemented by the Federal Reserve Board's Regulation Z and sets the standards for how APRs are calculated. Since mortgage companies have to abide by these standards, there is a basis for comparisons between loans.
on a fixed-rate loan should always be greater than or equal to the nominal interest rate. For it to be lower would require that the lender rebate back to you some of your interest expense.
of an APR is considered accurate if the rate disclosed is within an eighth of a percent more or less than the actual rate, or the actual rate rounded to the nearest quarter of a percentage point. (The Federal Reserve Board may also allow a greater tolerance to simplify compliance where irregular payments are involved.)
Code, Title 15, Chapter 41 (Consumer Credit Protection) gives all the details about what is and isn't included in calculating the finance charge on your loan. Beyond the rounding permitted by law, the biggest problem in comparing APRs from different home mortgage lenders is the lender's ability to estimate the closing costs that are included in the APR calculation.
lenders' APRs to help you choose which loan. If the mortgage rates are close, you should dig deeper. Either ask the lenders to show you the costs they included in their APR calculations and discuss with them whether these costs are actual or estimated, or calculate your own APR for the competing loans.