Real Estate Term of the Day: Annual Percentage Rate (APR)
ANNUAL PERCENTAGE RATE (aka: APR) – the effective rate of interest for a loan per year, disclosure of which is required by the Truth-In-Lending Law (Barron’s Dictionary of Real Estate Terms)
The APR rate is not to be confused with the note rate (or the interest rate at which your mortgage payments are based off). The purpose of the APR rate is to disclose the true cost of the loan which may include: lender origination fee, discount points, mortgage insurance, interest.
The APR is designed to help you shop for loans by making them more comparable. “It’s the one common denominator by which you can compare loans side by side, comparing apples to apples to apples,” says David Newton, an economics professor at Westmont College in Santa Barbara, Calif. As Newton explains it, APR measures the net effective cost of borrowing — “the actual present value of those funds over the length of the contract.” In other words, APR answers the question: “Is it worth it to pay more upfront to get a lower rate?” The federal government requires lenders to quote APR because loans frequently are offered on different terms.*