What is my APR? Why is it higher than my interest rate?

This question is a common question that homebuyers and mortgage applicants ask regularly, when they see the Truth in Lending disclosure. Here is the difference:

You will see a sample Truth In Lending statement, that all borrowers will see before moving forward with a loan, and again after the rate is locked and at the closing.

The mortgage interest rate is simply the rate charged for borrowing the amount of the home loan. This figure multiplied by the mortgage loan amount determines the monthly principal and interest payment. The example below shows a homebuyer borrowing $133,527 at an interest rate of 4.75% on a 30-year fixed mortgage, resulting in a principal and interest payment of $696.54.

1) The APR (Annual Percentage Rate) is the true cost of the loan expressed as a percentage rate. In English, this takes into account the mortgage interest rate plus the fees associated with required to finance the mortgage. This is another way for the borrower to determine the best loan for their particular situation when shopping for a loan. All Mortgage Bankers are required to show you a Truth in Lending disclosure that will show you both the mortgage interest rate as well as the APR next to each other so you can see the difference.

2) The Finance Charge is the cost of the loan over the entire term, in this case a 30-year mortgage. In this example the borrower will pay $132,431.32 over the life of the loan if making all 360 payments as scheduled.

3) The Amount Financed is the loan amount.

4) The Total of Payments is the total of the principal and interest paid on the loan over the entire term. Do you see the impact of long term interest?

I want to make sure that all borrowers that I work with understand the transaction, so that they are comfortable enough so that when we are at the title office all that is needed is for the documents to be signed, and get those keys to your home.

John Lyng is a Mortgage Loan Officer with Supreme Lending. He is experienced with traditional bank programs, as well as alternative programs to help people get into their home. John has a varied background in working with mortgage banks and non-profits, and believes in guiding families to prepare for affordable homeownership.

If you have questions about this or any mortgage-related topic, please contact John Lyng directly at 214-862-3579, or send an email to John.Lyng@SupremeLending.com.