Can someone explain to me the difference between the rate and apr?

Asked by Bart, 94538 Tue May 24, 2011

Can someone explain to me the difference between the rate and apr? Also here on Trulia and other web site that compare mortgage rates from lenders, some times the rate is bigger than the apr and other times the apr is bigger than the rate; why?
Thanks

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"Hey guys, I donâ€™t think the APR can ever be less than the note rate, wouldnâ€™t that indicate the lender paid the borrower to take out the loan? I have seen it the same in a no closing cost 2nd, but have never seen it less. Anyone every had it less than the note rate and if so how did that occur?"

The APR will calculate less than the note rate on an ARM when the fully indexed rate is lower than the note rate. Currently the LIBOR index is at .7317 so if you did a 5/1 ARM at 3.5%, with a 2.25% margin, your fully indexed rate would be 3% (rounded up to the nearest 1/8th) possibly resulting in an APR that is lower than the note rate.
Web Reference: http://WeFixRates.Com
1 vote Thank Flag Link Wed May 25, 2011
Bart,

Simply put, APR is the "price per pound" of the money. When you go into a grocery store and you see the 32oz. box at one price, and the 24oz. box at another, you have to look at the price per ounce to know which is the better deal.

APR strives to do that with a mortgage. If you pay \$3000 to get a \$300K home loan from one lender, and \$5000 to get the same \$300K from another, the APR would be the way that difference would be represented, even if the "note rate" is the same.

Don't worry if this isn't 100% clear. Most loan officers don't get it either. If you need help, just get in touch.

Rob Spinosa
rspinosa@rpm-mtg.com
Bart:

Gregorio provided an excellent answer below regarding how APR can be less than the stated rate (TU!) and you have good answers regarding the difference between APR and Rate I won't repeat.

In addition, you may find the following article helpful as well: http://docs.Steven-Anthony.com/APR-CanCostYou.pdf

Best, Steve
Now that you mention it, been years since I closed an ARM. Thanks,
Interest rate - The percentage of an amount of money which is paid for its use for a specified time.

Annual Percentage Rate (APR) -The yearly interest percentage of a loan, as expressed by the actual rate of interest paid. For example: 6% add on interest would be more than 6% simple interest, even though both would say 6%. The APR is disclosed as a requirement of federal truth in lending statutes.

Source: Financial Real Estate Handbook, Sixth Ed, Stewart.
Hey guys, I donâ€™t think the APR can ever be less than the note rate, wouldnâ€™t that indicate the lender paid the borrower to take out the loan? I have seen it the same in a no closing cost 2nd, but have never seen it less. Anyone every had it less than the note rate and if so how did that occur?
Simpy put the interest rate is what they base your payments on. The APR is the total cost to you including points you paid to get the loan and costs of your loan such as appraisal fee, credit report fee etc...
Web Reference: http://www.ScottSellsNH.com
The rate is the the interest rate which you are being charged on the loan. It may be fixed or adjustable depending on the type of loan you choose.

The APR is a somewhat imaginary number that the government requires lenders to post indicating the total cost of loan as depicted by an interest rate which factors in all of the other costs (origination fees, document fees, filing fees etc) that the lender is charging. I say it's imaginary because the math used to calculate is is fuzzy and the calculation is based over the term of the loan (typically 30 years for a mortgage) and statistically most people sell their homes long before this so that the APR would actually be higher than posted as these additional costs do not end up divided by the full term of the mortgage but by a shorter period of time.

The best way to shop for mortgage is to have lenders prepare a Good Faith Estimate which will show you not only the interest rate they are offering but all of the other loan expenses as well.

Hope my explanation makes sense and good luck.
When the rate is bigger than the APR that typically means it's an ARM, as the APR on an ARM is based on the current index (which is extremely low right now) + a margin over that index. Using solely the APR to shop for a mortgage can be misleading. I recommend you compare the note rate (which is what your mortgage payment is calculated on), the terms of the loan (ARM, fixed, 20-year, 30-year, etc.), the rate lock period (10, 15, 25, 30, 45, 60 days, etc.) and the fees you are paying the broker or lender (called the "adjusted origination charge" on the good faith estimate - or if you have a fee estimate it'd be the underwriting/processing/admin/doc drawing/funding/etc. type fees towards the top of the fee estimate).

There are some instances where the 3rd party costs will differ depending on the lender you are using, this is especially true on refinances when lenders normally have a preferred 3rd party title/escrow company that is used... but not on purchases in California, here those 3rd party title/escrow charges are 9 times out of 10 dictated by the sellers choice of services.
The APR is a confusing number when mortgage shopping, it was originally designed to estimate your costs over the course of an entire year. The Federal Truth in Lending law requires mortgage companies to disclose the APR of loans when they advertise an interest rate. This was supposed to prevent them from advertising low interest rates and tacking on other costs that drive up the real cost of the loan.

A proper APR disclosure should include the following fees:

Discount Points. Commonly referred to as "points," these are increments of 1 percent of the mortgage that you pay at closing to lower your rate. True discount points can only be used to lower your rate and not as broker compensation.

Origination Fees. Often confused with points, this is a fee the lender charges for work they perform on the borrower's behalf. A "No Point" loan does not necessarily mean there is no origination fee.

Mortgage Insurance Premiums. This is insurance against defaulting on payment of the loan. Your lender may require you to pay mortgage insurance if your down payment is less than 20 percent of the selling price of the home.

Prepaid Mortgage Interest. Since interest is generally paid on a monthly basis and in arrears, prepaid mortgage interest is paid at closing to cover the gap between the time you close and the first of the next month.

The APR your lender quotes you should also include other fees such as escrow fees, notary fees and various other closing costs, but APR doesn't tell the whole story. There are other fees and costs, such as title insurance that are not included and mortgage originators can choose what fees they want to include without disclosing what they are. APR is little more than an estimate of the various costs of your loan, including the interest rate and it's not an exact science and unfortunately it's easily manipulated.

While APR is a good place to start comparisons, the best way is still to compare 2 loan programs side by side. Compare the rates and add the fees. If Loan A has a rate of 4.5% with \$5000 in fees and Loan B has a rate of 4.5% with \$6,000 in fees, It is impossible for Loan B to have a lower APR than Loan A unless it's being manipulated. Use your common sense and do the math yourself.
Bart,
The rate is the number used to calculate payments on a set balance. The APR is the total cost adding in the upfront loan costs on top of the total interest paid over the length of the term. If both numbers are the same, there are no loan costs. If the APR is higher than the Note Rate, then there are closing costs you are paying up front.
If you take 100,000 at 5% you will come up with a payment. If you total the interest plus the closing costs and then recalculate the interest backwards you'll have the APR. I hope this helps.