This video outlines the details of the difference between the APR and your Interest rate.  Great video to send to your borrowers at the last step too.

It’s important to understand all the costs, fees, rates, and terms associated with getting a home loan.  You may have questions about what all the numbers mean and sometimes you may not feel like asking another question.  That’s why we are going to explain in this video, the difference between APR and the Interest Rate you are quoted.  To begin, let’s look at the difference between the two.  It really is amazingly simple.

APR stands for Annual Percentage Rate and it is the annual cost of your loan including fees that you pay.  It is a broader measure of the cost of borrowing money than just the interest rate.  The APR reflects the interest rate, any points, mortgage broker fees and other charges that you pay to get your home loan.  Unlike an interest rate, which is a locked-in rate, the APR includes other charges or fees such as mortgage insurance, closing costs and any discount points and loan origination fees.  For that reason, APR is generally higher than your interest rate.

The APR represents the nominal rate of interest charged on your loan plus prepaid finance charges that reflect the total cost of the loan with your lender.  Oftentimes, borrowers interpret a lower offered interest rate as a better value, but that isn’t necessarily true.  To know for sure, compare one loan’s APR with another loan’s APR to get a fair representation of total costs associated with getting the loan.  And be sure to analyze the long-term costs of interest rates, mortgage insurance premiums, and costs on each loan program as well, as these relate to actual dollars over the lifetime of the loan.

Lenders are mandated by the Truth-in-Lending Act to disclose APR on every consumer loan agreement and all lenders must follow the same rules for calculating APR to ensure the accuracy of this tool as a loan comparison.   Your lender is required to send you a loan estimate that details all the costs associated with doing a home loan with them.  You can find both the interest rate and the APR on the loan estimate.  The interest rate is located on page one of the loan estimate, under loan terms.  This is the interest rate of your loan.   It is also important to note in the top right of the loan estimate an area that indicates whether your rate is locked or not locked.  No, means that your rate is not locked in and can change.  Yes, in this area means that your rate is in fact locked in and how long that rate is good for.  Your lender will send you a revised loan estimate once your rate is locked in and this area will indicate that your rate is in fact locked in by showing a Yes, and a date and time that your lock is good for.

The APR is located on page three of the loan estimate under comparisons.

Knowing all the costs associated with getting your home loan and understanding the numbers is important, so you want to be sure to work with a lender who can explain the costs and offer a good comparison to allow you to make an informed decision.