Defining Mortgage Terms: APR
As you go through the home buying process for the first time, you will likely encounter terminology that is new to you. One of these terms is a common acronym, “APR,” which stands for Annual Percentage Rate.
What is APR?
In the context of a mortgage, the APR refers to how much the loan will cost the borrower on an annualized basis. The APR for a mortgage is written as a percentage, and it includes both the interest rate and other fees and costs that are fixed amounts and are directly related to the loan.
The federal government developed the standard APR format to provide a number for comparison shopping purposes, since loans or credit agreements can vary in terms of interest rate structure, transaction fees, late penalties and other factors. A standardized computation such as the APR provides borrowers with a number they can compare to rates charged by other potential lenders.
Since the APR includes both the interest rate and the fees and costs, it is usually higher than the interest rate. These costs might include a loan origination fee, points or mortgage insurance premiums, but the APR doesn’t include all of the fees and costs of a mortgage loan. For example, a title fee or appraisal fee normally would not be included in the APR.
Comparing APRs
You can use the APR as a guideline when shopping for loans, but you should not depend solely on the APR when choosing the loan program that’s best for you. You should look at total fees and possible rate adjustments in the future if you’re comparing adjustable rate mortgages. Plus, you should consider the length of time that you plan on having the mortgage.
Don’t forget that the APR is an effective interest rate—not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow and the term of your loan.
About UW Credit Union
This information is provided to you courtesy of UW Credit Union, based in Madison, WI. UW Credit Union is a leading provider of home loans in Dane County and throughout Wisconsin.
For more information about the home loan process, please contact a UW Credit Union Home Loan Specialist at 800.533.6773, ext. 2810, or vist UWCU.org.
