Responsible home buyers do their homework and research when securing a mortgage. You ask lots of questions, compare fees and interest rates, and more to see who has the best deal for your situation. One of the questions I get asked the most is “what exactly is APR and why is it different than the interest rate I am being quoted?”
Why are mortgages are quoted with an interest rate and APR?
The practice of disclosing the APR came about as part of the Truth in Lending Act (TILA) of 1968. The purpose of this federal law was to protect you by making it a requirement that you get all the term and conditions of the finance charges in a loan. The APR gives you a clearer understanding of the annual cost of your mortgage because in addition to the interest, it includes the other costs like mortgage insurance, closing costs, and discount points.
How does knowing the APR help me?
The APR is a great tool to help you shop different lenders and loan products. Many consumers believe that a loan with a lower interest rate is a better deal than one with a higher one. This might not be the case if the loan with the lower interest rate has higher fees than the loan with the higher interest rate. By comparing the APR for each of the two loans, you will know exactly which loan product offers the better value for you and your family.
In conclusion, we recommend that you only use the APR when shopping for loans. It is the most effective tool to compare the true cost of a mortgage.