How is an ‘Annual Percentage Rate (APR)’ calculated?

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The annual percentage rate (APR) estimates the total interest rate you will pay on your mortgage, including any additional lender fees.

In your mortgage statement, you will see two interest rates, and the APR is always the one with the higher percentage. It accounts for all charges that come with the loan, showing the true cost of a mortgage.

There are two types of Annual Percentage Rates, fixed and variable. In the case of a fixed APR, the rate will be the same over the mortgage term. In the case of variable APR, it will change according to the changes in Treasury or WSJ prime rate index. Some credit card issuers may change the fixed APR rate from time to time but not without notifying the user 30 to 45 days prior.

Both APR types include the interest rate, discount points, and various charges like the closing costs, private mortgage insurance (PMI), to name a few. However, they don’t include expenses associated with buying a home, such as a title search, title insurance, appraisal, transfer taxes, and more.

To acquire a good mortgage rate, you must clearly understand your interest rates and APR fees. If you take a 15-year loan, you need to pay the interest every month, but the APR has to be paid at the closing. Some institutions offer 0% APR if you can pay off the loan within a certain period.

When shopping for mortgages, compare APR rates offered by various lenders to find the best deal. Stay away from the lenders that warrant an unreasonably high APR for the same interest rate. However, don’t get too focused on APR only because you may end up paying more by ignoring a lower interest rate for the sake of a low APR.