Annual Percentage Rate (APR)

What Is the APR?

APR is a measure of the cost of credit that includes loan fees paid to the lender upfront, as well as the interest rate. The higher are the loan fees, the larger will be the APR relative to the rate. If there are no loan fees and the rate is fixed through the life of the loan, the APR will equal the rate.

What Is the Purpose of the APR?

To provide a single comprehensive measure of the cost of credit to the borrower, which they can use to compare loans of different types and features, and loans offered by different loan providers.

The APR is a mandated disclosure under Truth in Lending. Mortgage shoppers confront it as soon as they search for interest rate quotes, because the law requires that any rate quote must also show the APR.

Can All Borrowers Rely Safely on the APR?

No, some should ignore the APR, including:

* Borrowers who expect that they will sell their house or refinance the mortgage     within 7 years.
* Borrowers looking to raise cash, who are comparing the cost of a cash-out refinancing with the cost of a second mortgage.
* Borrowers with little cash who need a high-rate loan with negative points (rebates) to cover their costs.
* Borrowers shopping for a home equity line of credit (HELOC).

The APR is most useful for borrowers shopping for an adjustable rate mortgage (ARM), who expect to hold the mortgage a long time, and who are not doing a cash-out refinance, a low or no-cost mortgage, or a HELOC.