What is APR?
Annual Percentage Rate, or APR, is the most commonly misunderstood term in borrowing.
The use of APR was required as of the Truth In Lending Act, the purpose being to help prospective borrowers understand the cost difference between rate offers.
APR, unlike the interest rate, offers a look at the true cost of financing by combining both the interest rate you’ll pay over the life of the loan, plus the upfront closing costs paid to borrow the money. These two costs are calculated together into one rate.
In acquiring a mortgage, there are various closing costs. Only closing costs charged in connection with borrowing money are included in the APR calculation.
APR is not a perfect calculation of the true cost of financing. This is because you will have the opportunity to prepay your loan. The APR is only exactly accurate if you borrow for the full term of the loan. So when considering rate offers, make sure you consider how long you will hold your mortgage. The shorter you hold your mortgage, the less you want to pay upfront. I’m happy to go through specific examples with you.