What is an APR?
A Truth-in-Lending statement is a Federal required document that must be provided by a lender to all mortgage loan borrowers. Its purpose is to help borrowers compare the cost of one loan against another.
However, the document is confusing. One of the terms in the document that adds to the confusion is the “APR” Annual Percentage Rate.
At first glance, one would expect the APR to be the annual interest rate that a lender is charging to make a loan. It’s not. Instead, it is a cost indicator. It includes a lender’s loan costs and fees, and is intended to help the borrower to compare the complete cost of one loan against another. Here is an example:
A borrower wants to loan $200,000 for 30 years from a lender who charges a 5% interest. The lender also charges an origination fee of $1,000 plus, closing costs of $2000. The monthly payment is quoted as $1,089.75.
To arrive at the APR, we have to calculate backwards to find what interest rate would be required to arrive at a payment of $1,089.75 for a $200,000 loan if one excluded the origination fee and closing costs. The result is an APR of 5.13%.
Using the same calculation method, the APR charged by another lender who charges greater or lesser fees and costs will be different. A borrower is then able to compare one loan against another.
Hopefully this information is helpful to buyers who are not familiar with Federal required Truth-in-Lending statement. For further information, We will be happy to introduce you to our lender.
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Marius J Smook – Licensed Real Estate Eco-Broker, LEED AP for HOMES, Home Energy Rater.