Mortgage APR vs Interest Rate

Mortgage APR vs Interest Rate: What Should You Go For?

When you’re shopping around for a mortgage loan, comparing loan offers from different lenders can become an intimidating task. The interest rate (also known as the note rate) that is applied by the lenders to work out your monthly payment is just a portion of the total cost of a mortgage. This is the reason why it becomes so confusing for the borrowers to compare mortgages when they only take the interest rate into consideration. A better technique of comparing mortgage loans is the mortgage APR or Annual Percentage Rate.

The Mortgage APR Formula

The mortgage APR formula merges the interest costs of a loan with other charges required by a lender for the duration of the loan. Mortgage APR is expressed as a yearly rate. Hence, Mortgage APR lets you know the actual cost of borrowing and is a better tool than interest rate to compare loan offers. Borrowers can use it as a helpful yardstick.

The Truth in Lending Act

The Truth in Lending Act necessitates lenders to clearly mention the APR on the advertisements of their loan products. It is typically stated just after the note rate. The goal is to stop lenders from advertising cheap interest rates to attract consumers and at the same time, covering fees.

Limitations of APRs

Though comparing APRs is more helpful than just comparing the interest rates while looking at various mortgage offers, it has some limitations:

Some upfront fees are not incorporated in the formula – like credit report fee, home appraisal fee and title fee. These fees might differ from one lender to another. You should remember to request your lender for a Good Faith Estimate for closing costs and question them to know which ones are not included in the APR.
Mortgage APR is handier for fixed rate mortgages than adjustable rate mortgages. As nobody can forecast how interest rates would vary with time, the APR for adjustable rate mortgages is calculated on the basis of predictions, which might prove to be incorrect.
The APR takes for granted that you would bear the loan for its entire tenure, which might be 30 years, however, only a small number of homeowners hold a mortgage for such an extensive period. If you intend to refinance within 5-7 years, a loan with bigger upfront charges can land up being costlier than what its APR implies.

This information is brought to you courtesy of Max Harper – Visit Max’s web site at or email Max at

For additional information about Lethbridge Alberta Real Estate, please view my primary web site, or contact me at 403 329-0479, email:

Published in: on July 22, 2009 at 5:06 pm  Leave a Comment  

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