What is the difference between the interest rate and the A.P.R.?

You'll see an interest rate and an Annual Percentage Rate (A.P.R.) for each mortgage loan you see advertised. The easy answer to "why" is that federal law requires the lender to tell you both.

The A.P.R. is a tool for comparing different loans, which will include different interest rates but also different points and other terms. The A.P.R. is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.

While it's designed to make it easier to compare loans, it's sometimes confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.

The A.P.R. on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make -- that's why they're variable rate in the first placed!

So, A.P.R.s are at best inexact. The lesson is that A.P.R. can be a guide, but you need a mortgage professional to help you find the truly best loan for you.

Note when you're browsing for loan terms that the A.P.R. will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you'll see that A.P.R.s on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time.

Lenders use a document called a Truth In Lending Disclosure  (TIL) to inform you of the APR. The TIL  has a series of boxes under the customer information. The A.P.R. is the cost of the loan including the costs paid at closing and any mortgage insurances on the loan. The Finance Charge is the total amount of interest you would pay for the term of the loan, any mortgage insurance costs and the up front costs assessed at closing. The Amount Financed is the loan amount minus the costs paid at closing. The Total of Payments is everything rolled into one impressively large number.

The schedule of payments will include the principle and interest (P&I) and any projected mortgage insurance payments. These payments do not include payments made into an escrow account.

The Demand Feature lets the borrower know if there is a "Balloon" payment on the loan. When a loan has a demand or balloon feature, the balance at the time designated in the contract must be paid and the loan paid off. Most balloon loans are for 5 ro 7 years.

If you are getting a Variable Rate Loan (or Adjustable Rate Loan) this is indicated by the box being checked.

The Security is the property that you are using as the collateral for the loan.

The Recording/Filing Fee is the cost to file the required documents with the county so that the mortgage is valid. Mortgages must be recorded to be valid and legally recognized.

If your loan has a prepayment penalty this will be indicated in the next section. The details of the prepayment are usually spelled out an an accompanying document.If the loan has a feature that allows for some type of rebate of interest paid on the loan if it's paid off early, it will indicate that prepayment section too.

Loans such as FHA and VA loans and some Adjustable Rate Mortgages allow the original note to be assigned to another party. This is called an assumption. The next section lets you know if your loan is an assumable loan and if the customer will be required to qualify in order to complete the transfer of the loan. This feature is a great part of FHA financing. I speak about it more in the FHA article.