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What's the difference between "Rate" and "APR" and why is one higher?

  • January 06 2009 - Denver
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Be a Good Neighbor. Be respectful and on-topic. No spam or self-promotion! See our Good Neighbor Policy.

 
 

Answers (19)

" The additional costs might include things like your prepaid interest, private mortgage insurance or any closing costs." 

This was also stated in the APR post yesterday. Prepaid interest does not elevate APR.
  • May 05 2009
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The interest rate is the “Yearly Rate” a lender charges for allowing the borrower to use their money for a given time period. This can also be called your “Note Rate”.


The APR consists of 2 factors, your actual interest rate (a.k.a Note Rate) plus any additional costs. The additional costs might include things like your prepaid interest, private mortgage insurance or any closing costs. Basically, the APR shows the total cost of credit on a yearly basis after ALL charges are taken into consideration. It is typically higher than your actual interest rate because it includes these additional items and assumes you will keep the loan to for the full term.

  • May 04 2009
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Profile picture for Nate
Great responses. 
I also just posted a blog post on the Zillow Mortgages Unzipped blog explaining the difference between interest rate and APR.  I hope it helps.
Thanks,
Nate
  • May 01 2009
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I knew when I read the title of this thread, it would be enjoyable, and it was, in fact, very enjoyable to read some of the responses. 
  • January 08 2009
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I still recommend that the APR be explicitly explained to the client.  It is the cost of the loan; annualized.  I guess it is artificial if you decide to sell two years from now.  The cost is amortized through the life of the loan.

I explain how this number is computed so the client can play with the APR to truly compare costs of his loan.  Mortgage insurance IS a cost of money so it needs to be included.  You can elect to have NO mortgage insurance and have it LP (Lender paid). But your rate and APR would be higher. The client can delete interest and title charges and add in one time costs etc to compare his cost of money. 

On Adjustable notes, (Not existent in today's market) you need to include the APR with the worst case scenario.  A no cost loan with 8% margin can only be seen in the APR. All these 2/28 or 3/27 loans had 18% + APR, but mortgage salesmen told the clients that this "APR" did not matter....not to look at it or that it was artificial...

I also now recommend my clients to roll in their cost of a previous loan into their APR.  Refi addicts want that trophy low rate forgetting how much they have paid in previous notes that were amortized for 30 years and they held for 12 months.  Ouch!

How about those 2/27 !  How high would that APR be if they were amortized for 24 months!!!!  34% ?  And people wonder why they all went bust.

  • January 07 2009
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It is interesting to read through all the responses on this and many of the other threads to see who the pro's are......

As I tell my borrowers -

APR is an artificial number we are mandated by law to provide, which is only a tool to compare two or more identical loan proposals to determine which might have overall higher fees associated with the loan. If the APR is higher, it could be an indication that the fees associated with the loan are higher.

As many of you have correctly indicated, APR's can be manipulated by the lender by including or ignoring fees and costs that should be included in the APR calculations. It is not always an accurate reflection of the true costs of the loan.
  • January 07 2009
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Jaime, is it only Mortgage Brokers that manipulate the APR? Yes, you will se an APR in ads and when you read the fine print, it is always an 80% ltv since MI has the most impact. The APR will not save you when the 3.875% rate with 4.5 points is an arm at 80% because the apr will still be lower than the note rate. The most important document is not the TIL, it is the Good Faith Estimate. Just look at the rate and what it is costing, that's all. You do not need an imperfect government formula to understand that.   
  • January 07 2009
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APR , annualized percentage rate.  Very important but can be manipulated by Mortgage brokers.  Federal law prohibits advertising an interest rate with out an APR.  Every time you see an interest rate you will see the APR next to it.

An interest rate is useless without the APR.  How about an 30 year fixed MTG at 3.875% ! Sounds good until you learn you paid 4.5 points in fees to get that.

The TIL (Truth in lending) should be your first document you study from a lender/broker.  Most are not correct but you will have to sign one at closing that is.

  • January 07 2009
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ianterowsky, you should ignore the APR altogether, Only focus on the interest rate, the term ( 15 Yr, 30 Yr,5/1 Arm, etc) and the closing costs. APR figures can be misleading. Mortgage Insurance has far more impact on the APR than anything, and even if you were refinancing and paying cash for closing costs, the APR would still be much higher if mortgage insurance was included. The same holds true for a no closing cost loan with MI. You will also see an APR number way below the interest rate in todays quotes and that is because the margin and index are far less than what the lenders start rate is. The APR on Arms is meaningless since the rate will move up in the future. The government created APR to help consumers but it doesn't and I have seen a few Closing Attorneys struggle to articulate what APR is or does. BTW, that's a great looking can of spam. 

  • January 07 2009
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Let me try-The cost of the loan is a factor on day one of the loan. Interest is paid in arrears. So, your February payment represents January Interest. With that said, Althought your loan amount might be x amount of dollars, 250K, with prepaid interest and closing cost, the actual amount you are borrowing, on day one, might be 248K, and that spread increases your true loan cost in a yearly rate.. Look at a Truth in Lending Statment and look under Actual Amount Financed. On day one of the loan, It is usally less than the Loan amount, which cause the APR to be different, higher, than the Contract Rate. Look at it this way, if you brought a check to the table for all the fees and closing cost, APR and Contract Rate should be equal. The difference between the actual amount financed and the Loan Amount Should be the Prepaid Finaces Charges. Oh and you can check this out at my website, oops, no can spam.........
  • January 07 2009
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The actual rate is the percentage used to calculate your monthly payment.  This rate is also considered your daily periodic finance charge.  The APR for mortgages was created to give you a better tool to compare one mortgage offer to another.  APR percentages include the interest for the life of the loan along with the costs of mortgage financing and pre-paid fees.  This one individual APR compared to other lender's offers gives you a level playing field of comparing and seeing who is best.
  • January 07 2009
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Good post, excellent distribution on your url.  Two thumbs up.
  • January 06 2009
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Michael,
You are full of crap and don't even know what you are talking about in so many of your posts.
This new format allows jokes like you to be on ZMM.  Lucky for you that you have slithered on here now because back in the day---prior to 10/08, you would have been torn to pieces for your total idiotic, spamming posts.
How I miss those days when lenders like you would try to broadcast and spam their way here only to caught for who and what they are----a buffoon and a joke to our industry.
  • January 06 2009
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Hi Michael-

This is Gracey from Zillow.

Please refrain from providing your contact details on your comments. The users can go to your profile page to view your information. Please abide by the Good Neighbor Policy (http://www.zillow.com/how ... olicy.htm) in the future.

Thanks for your understanding.

  • January 06 2009
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Michael's just classy like that Nickers, classy like that on all his posts.
  • January 06 2009
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Keep it Classy Michael. Are you an ex-employee of Lennox Financial by chance?

  • January 06 2009
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Not only is he spamming but he is offering awful advice.  Although true no cost loans can be beneficial for some you shouldn't always try to do one.
  • January 06 2009
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  • January 06 2009
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The difference between the two is that the APR takes in consideration the closing costs and pre-paid item fees.  The rate is your actual rate for the term.
  • January 06 2009
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