Why is the APR more than the fixed rate? E.g. Our APR is 7.27 but our fixed rate is 6.875.

Asked by L, Texas Sun Aug 17, 2008

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Ute Ferdig, Agent, Auburn, CA
Sun Aug 17, 2008
Hello L. The APR is higher because it takes the cost of getting the loan into consideration. While your monthly interest payments are still based on the 6.875%, because you had to pay something to get the loan, the actual cost of the loan is more than the 6.875%. For instance, if you get a $250,000 loan and you pay $5,000 to get the loan, then you'll pay 6.875% interest every month based on $250,000, but the bank has to tell you what the annual interest rate is if they considered the $5,000 you paid to get the loan as interest. The difference between the fixed rate and the APR is calculated by a computer program and takes all kinds of different factors into account. Your loan agent should be able to explain this better to you and he/she may even have the program to convert the cost of getting the loan into a percentage rate. I hope this makes sense. I know I had the same question when I purchase my first home many years ago and my loan agent was not able to give me an exact answer. He explained it to me, but did not have a program to calculate the APR.
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