Why Most People Are Confused About The APR?
If you are currently looking at real estate properties’ advertisement or if you have already bought a house, you may have noticed next to the payment amount a number or rate called the APR. You may wonder what this number means. In fact, APR stands for annual percentage rate.
During your application for a mortgage, the lender is supposed to mail you a "good faith estimate" and a "truth in lending statement" within three business days. The note rate is quoted and along with the APR. You will notice that the APR will always be higher than the note rate you are quoted.
This is mainly because APR is a totally artificial number. It is not the note rate on the loan and does not determine your monthly payment. APR is computed according to a formula determined by the government and is supposed to provide a method for comparing one mortgage offer against another, even when the rates, points, and costs differ. The APR is supposed to help you determine your true cost of borrowing.
As a consequence, the APR is always higher than the note rate you are quoted. The only exception is when the lender pays for all of your costs. In this case you will have a so-called "no cost" loan. There really are costs but the lender is just paying them for you.
Bear in mind that the APR is a complex number calculated by computers. But there is also some guesswork involved. Also, no lender really knows all the costs until the loan actually closes, that is why the Good Faith Estimate is called an estimate. Since costs affect the APR, it cannot be accurately quoted until the end of the process. The only thing you should really know is that you should choose a mortgage offer with the lowest APR. The lower, the better is the deal.
However, you should not make your mortgage offer based only on the APR. Your true cost of borrowing may depend more on how long you keep the loan than anything else. Paying more in points to get a lower interest rate may save you more money if you intend to remain in the property for a long time even though it has a higher APR.
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