Annual Percentage Rate- Annual percentage rate is expressed as the periodic interest rate times the number of compounding periods in a year (also known as the nominal interest rate); since the APR must include certain non-interest charges and fees, it requires more detailed calculation. An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment.
Like an interest rate, the APR is expressed as a percentage. The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. All lenders must follow the same rules to ensure the accuracy of the APR.
The annual percentage rate (APR) can be seen on your mortgage loan disclosures and is calculated by including mortgage lender fees and other items that will affect your monthly payment – like private mortgage insurance or PMI. It does not consider monthly escrow payments to homeowners insurance or property taxes.
The rate is calculated by multiplying the periodic interest rate by the number of periods in a year in which the periodic rate is applied. It does not indicate how many times the rate is applied to the balance.
*graphic provided by ivestopedica.com
Unlike interest rate, APR includes the following costs and fees in the calculation:
- Discount Points
- Private Mortgage Insurance
- Lender Origination Costs
The APR must be disclosed to the borrower within 3 days of applying for a mortgage and is found on the truth in lending disclosure statement, which also includes an amortization schedule.
For more information about APR and other mortgage terminology, feel free to contact one of our Home Loan Consultants.