When shopping for a mortgage, comparing loan offers can be confusing. Often lenders advertise low interest rates to attract borrowers. The interest rate is used to calculate the monthly payment (note rate) is only one part of the overall mortgage costs.
Annual Percentage Rate (APR) is a much better indicator than just the interest rate of the actual cost of a mortgage loan, as it estimates what you’ll pay over the course of an entire year. The federal Truth in Lending Act requires mortgage lenders to list the APR of loans.
APR is calculated from interest rate, origination fees, points, mortgage insurance premiums, inspections, prepaid interest and other lender fees may also be required to obtain a mortgage.
When comparing home loans, that is why it’s better to look at the APR. Although it’s not perfect, there are other costs which is not included, such as title insurance. However, APR gives borrowers a nice standard for comparing the percentage costs of mortgage loans.
When you apply for a mortgage the Federal Truth in Lending Disclosure form will be sent, which includes the Note Rate (the interest rate used to calculate your monthly payments) and the Annual Percentage Rate (APR).
The Annual Percentage Rate will be higher than the Note Rate, because the APR includes other borrowing costs associated with obtaining a mortgage loan.
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