Buying a home is a huge investment and can be a complicated process. To make loan comparison simple, lenders are required to inform borrowers of each loan’s annual percentage rates (APR). Understanding the difference between interest rates and APR will help you make an informed decision when shopping for mortgages in KC.
The Purpose of APR
The interest rate alone is not the most accurate expression of a loan’s cost. APR is a tool for better understanding the cost of a loan by giving homebuyers a standard for comparing interest and fees from different lenders. The APR is a more exact representation of the true cost of a loan, allowing you to evaluate the cost of the loan in terms of a percentage. Homebuyers need to compare the APR of different mortgages in KC to get a sense of which loan has the larger overall cost. In general, the lower the percentage, the better the loan.
How APR Is Calculated
The costs included in the APR are spread across the entire term of the loan, which is usually 30 years. APR is a more effective way of comparing loans than interest rate alone because it takes into account:
- Discount points
- Origination fees
- Mortgage insurance
- Closing fees
- Prepaid interest
However, APR typically does not include:
- Nonrefundable application fees
- Late payment charges
- Title insurance premiums
- Fees for title examination, property appraisals, or document preparation
Therefore, do not use APR as your only measure when comparing mortgages in KC. In addition, mortgage lenders do have the ability to choose whether or not certain items are part of the APR calculation, so make sure to look closely when you are comparing mortgages in KC.