what is the difference between mortgage rate and apr?
Mortgage
jsoosik58 asked:
I am considering refinancing and I see a mortgage rate of 5.75% and an apr of 6%
Lewis
I am considering refinancing and I see a mortgage rate of 5.75% and an apr of 6%
Lewis
May 23rd, 2009 at 8:56 pm
Alexander
A mortgage is a method of using property as security for the payment of a debt.
Technically the term mortgage (from Law French, lit. “dead pledge”) refers to the legal device used in securing the property, but it is also commonly used to refer to the debt secured by the mortgage.
In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.
In many countries it is normal for home purchase to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed; notably in Great Britain, Spain & USA
Annual Percentage Rate (APR) is an expression of the effective interest rate that will be paid on a loan. It is different from the “note rate” (the advertised interest rate) because it includes one-time fees in an attempt to calculate a “total cost” of borrowing money.
In a simplified example, if you borrow $100 for one year at 5% simple interest (meaning that you will owe $105 at the end of the year) and you pay the lender a $5 origination fee, your total cost to borrow the money will be $10 ($5 for the simple interest plus $5 for the origination fee) and your APR is a bit less than 10%.
APR is intended to make it easier to compare lenders. In the US, lenders are required to disclose the APR before the loan (or credit application) is finalized.
While there are several acceptable ways to calculate the exact APR, the general process is:
Total the included one-time costs and add them to the face amount on the loan
Calculate a monthly payment for that amount at the loan’s “note rate”
Calculate what interest rate would have to be applied to just the face amount of the loan in order to equal the calculated monthly payment in step 2.
May 24th, 2009 at 1:01 am
Andrew
The Federal Real Estate Settlement Procedures Act (RESPA) requires lenders to disclose APR, or annual percentage rate. There is only one acceptable method for Federal compliance. If your mortgage interest rate is at 5.75%, and your payment is a given amount, then the total amount of your mortgage, less any additional fees you are paying to the lender such as points, are deducted from your loan amount and the lower amount that results is used to back-calculate what the interest rate would be if your given payment were used to pay back the smaller amount. That rate is your APR. Theoretically this allows you to compare different combinations of rates and points, but in practice it isn’t so useful.
An example: Your loan amount is $100,000 at 5.75%. That would make your payment for 30 years 583.57 per month. If you paid two points to the lender, then using $98,000 and a payment of 583.57 your APR would be 5.937%.