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What is APR and how it differs from note rate?

Tue Oct 3, 2006 03:10PM | By Tony

See more in Personal Finance | Permalink | Email | Comments (0)

APR stands for Annual Percentage Rate, and reflects true annual cost of the money you borrow from a bank over full loan repayment period. Suppose you went to Wells Fargo and took 30 year mortgage for $100,000, with the note mortgage rate of 6.00%. The monthly payment is $599.55.
You also paid the closing costs of $2,000. So even though Wells Fargo lent you $100,000, in reality you only got $98,000. But you are paying $599.55 based on $100,000, aren't you?

Now you can calculate your annual percentage rate, based on the mortgage amount of $98,000, 30 year amortization and monthly payment of $599.55. The APR is about 6.188%. So the true annual cost of borrowing these $100,000 isn't 6.00%, but 6.188%. Why? Because to get the $100,000 you put $2,000 from your pocket.

Different lenders calculate APR differently and not all the closing costs you pay are often included. Here is the rough list of fees that normally are included:

- application or administrative fee
- discount and origination points
- loan processing fee
- mortgage underwriting fee
- document-preparation fee
- private mortgage insurance

Other fees that you may still have to pay, and often not included:

- title company insurance and closing fees
- different endorsements, e.g. condo endorsement, EPA endorsement
- escrow fee
- attorney fee
- notary fee
- home inspection fees
- recording fee
- city or state transfer fees
- credit report
- appraisal fee

So when comparing loans with different annual percentage rates, make sure you compare apples with apples in terms of related costs.

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