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  Mortgage APR

What is APR? The annual percentage rate - or APR - is the cost of borrowing money over a year. The percentage figure allows people to compare the cost they will face when taking out a loan or credit card. The main purpose of APR is to provide borrowers with a comprehensive measure of how much a loan will cost. The APR can then be used to compare different types of mortgages that are being offered. Also it provides a tool to use when comparing loans being offered by different financial institutions. APR is mandated under the Truth in Lending Act and borrowers will encounter this term as soon as they begin looking for mortgage interest rate quotes. The law requires any interest rate quotes to also show the APR.

While the APR provides insight as to how much a borrower will pay for a loan, all borrowers do not have to consider it. Borrowers who are planning to refinance or sell the home within 7 years do not need to consider the APR. The reason for this is because over shorter periods the APR is biased to favor loans that offer lower interest rates combined with high fees. Essentially, the APR combines the fees with the interest that is paid each month; this means that the APR assumes the loan will run its full term. It is this assumption that creates the bias that a loan with a low-interest rate and higher fees creates a lower APR.

The annual percentage rate on a mortgage is a better indication of the true cost of a home loan than the mortgage interest rate by itself. The APR takes into account not only the mortgage rate but also things like closing costs, discount points and other fees that are charged as part of the loan. This Mortgage APR Calculator takes all of that into account to determine what your APR will be on a home loan. It will also calculate what your monthly payments will be as well as showing your interest costs and payments over the entire length of the loan.

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  Related Mortgage Terms
Principal The amount borrowed or the remaining unpaid balance of a loan excluding unpaid accrued interest; also refers to the portion of the monthly payment that reduces the outstanding balance of a loan.
Term The time frame when a loan line of credit must be repaid. The most common mortgage terms are 15 years and 30 years.
Interest rate The cost a customer pays to a lender for borrowing funds over a period of time expressed as a percentage rate of the loan amount.
Closing Costs Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing is the point in time when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer or seller.
Origination fee An origination fee is an upfront fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place.
Discount points Discount points are prepaid interest. The purchase of each point generally lowers the interest rate on your mortgage by up to 0.25%. Most lenders provide the opportunity to purchase anywhere from one to three discount points.
Other costs Any other fees that should be included in the APR calculation. These fees can vary by lender, but at a minimum usually includes prepaid interest.
APR (Annual Percentage Rate) An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account. As loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors, a standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders.
Total monthly This is the effective monthly mortgage payment, which includes all of the fees/points and puts them back into the principal of the mortgage. This is not the amount you would actually pay each month, but the value is used to compute the effective APR.
Monthly PI This is a monthly mortgage payment that only includes the loan principal and interest
Total Total of all monthly payments over the full term of the mortgage.
Interest Total of all interest paid over the full term of the mortgage.