Also known as A.P.R. the Annual Percentage Rate is the cost of your credit expressed in terms of an annual rate. The A.P.R. takes into account “points” or “closing costs” that may be included in your loan amount and is often higher than your interest rate for this reason.
As I researched Annual Percentage Rate or APR, I found many definitions for it. Here are a few. Some are easier to understand than others.
- The APR includes both your interest and any additional costs or prepaid finance charges you might pay, such as prepaid interest, private mortgage insurance, closing fees, points, etc. Your APR represents the total cost of credit on a yearly basis after all charges are taken into consideration. It will usually be slightly higher than your Actual Rate because it includes these additional items and assumes you will keep the loan to maturity.
- This is not the note rate on your loan. It is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. It works sort of like this, but not exactly, so only use this as a guideline: deduct the closing costs from your loan amount, then using your actual loan payment, calculate what the interest rate would be on this amount instead of your actual loan amount. You will come up with a number close to the APR. Because you are using the same payment on a smaller amount, the APR is always higher than the actual note rate on your loan.
- Measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other loan charges (points, PMI, etc). Since all lenders follow the same (complex and sometimes error prone) rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans. Only a zero point, zero closing cost loan would have an APR equal to the actual Note rate. The APR is almost always greater than the Note Rate.