ANNUAL PERCENTAGE RATE (APR)

One effective way to compare various lenders and loan programs is the annual percentage rate (APR) offered. The APR calculates the total annual interest cost of a specific loan amount and loan product, including not only the interest but also the other closing costs associated with the loan. The other costs may include the appraisal, credit report, inspection, processing and other fees. The intent of the APR is to give the consumer a tool to compare the cost of one loan product with another. The APR calculation is governed by federal law, which prevents lenders from misrepresenting the true cost of a loan by not disclosing all the fees in the early stage of the loan process.

Here is an example of an APR calculation. Let’s say that we are looking for a $150,000 loan. A lender quotes us an interest rate of 8.5% on a thirty-year, fixed-rate loan. Consumers may think their cost is 8.5% for the life of the loan, but we need to factor in the other fees to calculate the APR. Lets say we have a total of $3,075 of other fees and costs that will be incurred at loan closing, such as an origination fee, discount points, appraisal, processing fee and document preparation fees. The net loan amount, meaning the amount the borrower receives net of these fees, is $146,925. The monthly payment for a loan of $150,000 at 8.5% means an APR of approximately 8.73% on the net loan amount of $146,925. If another lender offers a similar loan at 8.625%, but offers to pay all the closing costs, then the APR may be lower than the 8.5% loan described above, which may indicate that it is a better deal for you.


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