What is an APR?

The Annual Percentage Rate (APR) is the vehicle commonly used to compare loan programs from different lenders. It's designed to measure the "true" cost of a loan and create a level playing field among lenders. The federal government requires lenders to disclose their APR whenever an interest rate is advertised. The APR is different from the interest rate, and does not affect your monthly payment.

APR Considerations:

		Practically speaking, the APR is a confusing number because the rules used to compute it are not strictly followed. Lenders use a government-provided formula that subtracts various closing costs from the amount borrowed, resulting in the amount financed. However, those closing costs often vary from one lender to another. For example… one lender might subtract only the loan application fee and not their processing fee, while another will deduct both fees. Therefore, when you compare these two APRs, it's like comparing apples to oranges.
		An APR doesn't take into consideration your rate lock-in period, which is the number of days a bank will guarantee or hold your rate. Two loans may have the same APR, yet one can have a 10-day rate-lock, and the other a 60-day rate-lock. (Please see What is a Rate-Lock). Again, you are comparing apples to oranges.
		Calculating an APR on an adjustable or balloon mortgage is more complex than tallying one with a fixed mortgage. That's because there's no way to predict future adjustments.
		An APR spreads the cost of a loan over its life... let's say for 30 years. But statistics show that most people don't keep a loan for more than 5-7 years due to refinancing or moving. Thus, keeping the loan for a term shorter than what the APR is figured upon can negate its validity.

At Trachtman & Bach, we recommend that you use the APR merely as a starting point to compare loans. Look at your monthly mortgage payment in addition to your closing costs and other out-of-pocket expenses. If your loan is for a short period of time, try to lay out less money up front. Higher costs with a lower payment are beneficial only over longer time periods. (Please see Should I Pay Points?).

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