What is the difference between the interest rates and A.P.R.?

From mortgages to car loans, anytime you see a loan program advertised you will also see the interest rate along with an Annual Percentage Rate (A.P.R.). You might ask yourself why both of these numbers are required. The easy answer is that federal law requires lenders to show you both so you can make an educated decision.

Since all loans have different interest rates, terms and points, the A.P.R is a tool for easy comparison of the different loans. Introduced as a way to represent the “true cost of a loan” to borrowers, the A.P.R. is expressed as a yearly rate. With A.P.R.s, fees and upfront costs cannot be “hidden” behind a low advertised rate. Its design was to make it easier to compare loans, but sometimes is confusing because the A.P.R. does not include all of the insurance premiums and various fees that go with a mortgage.

A.P.R.s can vary from loan to loan and lender to lender, as what goes into its calculation is not clearly defined by the federal law that requires it.

The A.P.R.s on Adjustable Rate Mortgages (ARMs), which are tied to a market index, assume that the market index will never change. Yet, A.R.M.s were invented because fixed-rate mortgages can either be cheaper or more expensive due to the change in the market index.

When browsing for loan terms, you should remember that the A.P.R. will not tell you about balloon payments or prepayment penalties or the length of the rate’s lock. You will also see that A.P.R.s on 15-year mortgages will have a higher relative rate due to the fact that points are amortized over a shorter time span.

As A.P.R.s are inexact at best, they should be used as a guide, but only a mortgage professional can help to find the loan that fits your situation.

Have more questions about rates that we didn’t cover? Give us a call at (720) 317-2500 to talk to one of our licensed Mortgage Advisors.


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