Annual Percentage Rate (APR)
Definition and meaning of Annual Percentage Rate (APR) in real estate.
The annual percentage rate (APR) is a broader measure of the cost of borrowing money that includes the interest rate plus loan fees, points, and mortgage insurance, expressed as a yearly percentage.
In more detail
Unlike the nominal interest rate, which only reflects the cost of borrowing the principal, the APR provides a more complete picture of the total cost of a loan. Under the Truth in Lending Act, lenders are legally required to disclose the APR so that consumers can compare different loan offers on an equal basis.
Two loans might have the exact same interest rate, but the loan with higher upfront closing costs will have a higher APR. Borrowers should note that the APR calculation assumes the loan is held for its entire term, meaning the actual cost of a short-term holding may differ.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Includes | Interest rate, origination fees, discount points, mortgage insurance |
| Required by | Truth in Lending Act (TILA) |
| Applies to | Mortgage comparisons and consumer loans |
A buyer compares two different loan offers and uses the annual percentage rate to determine which loan has lower overall fees and closing costs.
Frequently asked questions
Why is the APR usually higher than the interest rate?
The APR reflects both the interest rate and the additional upfront costs of securing the loan, such as lender fees and broker commissions.
Can I use the APR to compare adjustable-rate mortgages?
Yes, but remember that for adjustable-rate loans, the APR assumes the initial index value will remain constant, which may not happen in practice.