Zillow Advice: Mortgage Rates - What's the difference between "Rate" and "APR" and why is one higher?

The note rate is the interest ...

Tue, 06 Jan 2009 20:02:00 GMT

The note rate is the interest you are charged and the APR (Annual Percentage Rate) is the note rate plus the closing costs you pay to get the loan. If you are looking at an ARM then the APR also factors in what the interest rate will be after the fixed period ends.

The greater the spread between note rate and APR the more expensive the loan. That is why you should always try to do a True No Cost loan. You can learn more at www.vertex-financial.com

" The additional costs might ...

Tue, 05 May 2009 11:35:00 GMT

" 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.

The interest rate is the ...

Tue, 05 May 2009 03:17:00 GMT

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.

Great responses. I ...

Sat, 02 May 2009 05:23:00 GMT

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

I knew when I read the title ...

Thu, 08 Jan 2009 12:38:00 GMT

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.

I still recommend that the ...

Thu, 08 Jan 2009 05:34:00 GMT

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.

It is interesting to read ...

Thu, 08 Jan 2009 04:48:00 GMT

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.

Jaime, is it only Mortgage ...

Thu, 08 Jan 2009 04:18:00 GMT

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.

APR , annualized percentage ...

Thu, 08 Jan 2009 04:03:00 GMT

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.

ianterowsky, you should ignore ...

Thu, 08 Jan 2009 03:53:00 GMT

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.