Whats the difference between the “Rate” and the “APR” on a loan?

Deal Score0

I thought they were the same thing but I heard a Radio ad about a mortgage loan that advertised a 5.5% rate and a 5.95% APR??????
What gives?

The broker says my rate will be around 6.5% but they have to state APR 7.5% because it has to includes Mortgage insurance because of not putting 20% down. Is this correct? I understand I have to pay the PMI but should my APR be around the 7%? The loan is around \$ 400K 3% down.

great
February 17, 2011 at 5:11 pm

The rate is the actual interest rate…the APR includes cost associated with the loan when included in the amount financed over the term of the loan…you payments are based on the actual interest rate

PSD
February 17, 2011 at 5:48 pm

The “rate” is the percentage charged by the lender. The apr is this rate adjusted by any additional fees factored in, showing you the true cost of the loan.

fcas80
February 17, 2011 at 6:08 pm

5.5 could be compounded monthly, twice a month, etc. 5.95 APR is the equivalent annual percentage rate, and allows comparison with another rate that is compounded more or less often.

fukinluckyfuker
February 17, 2011 at 6:20 pm

APR, annual percentage rate, is a formula created by HUD to, at least in theory, make shopping for mortgages easier, because it includes some of the closing costs you pay, amortized over the term of the loan.

It is easily manipulated in a quote, by fixing the date of the closing to the last of the month. And your loan amount matters as well, since many of the APR-related costs are fixed, so the APR spread will be higher on a \$ 100K loan than a \$ 400K loan.

It’s also utterly meaningless on any ARM, because it’s calculated assuming that the rate only changes once, to whatever it would adjust to at today’s rates.

It’s pretty much illegal to advertise an interest rate without disclosing a corresponding APR. So that’s why you heard it.

And your payments are calculated off the note rate of interest, in your case 5.5%.

Just another example of our government trying to simplify things for the average consumer, and making it impossibly complex in the process.

Beverly S
February 17, 2011 at 6:41 pm

It’s not just the mortgage insurance- it’s any closing costs involved which are classified as interest- so any points etc. are added to the APR & that rate is your 1st years combined rate. However, a whole 1% difference seems excessive to me. Mine are usually about 1/2% higher. Sounds like they are hitting you pretty hard on closing costs. Also, I don’t like the sound of your broker saying your rate will be “around 6.5%” tell him to Lock it- FHA rates are rising 6.5 % is actually really good right now. Good luck!

Real Estate Guy
February 17, 2011 at 7:39 pm

the APR would also include fees, points, etc

I’m guessing you are paying some points.

crecubed
February 17, 2011 at 8:34 pm

Unfortunately APR in residential lending must include all costs to the borrower. This could include discount points. On an FHA loan MIP is required regardless of the amount of the down payment. PMI is only applicable to conventional loans as is the 80% or 20% down perspective. Youor broker doesn’t know what they are doing if they told you it was because you didn’t put 20% down. Your payments are based on the 6.5%. APR is simply a way to reflect what the cost of the loan is over a given period of time and amount. If you want to see how complicated the government makes this calculation determination check out the link to the FDIC source.

Ed Atun
February 17, 2011 at 8:47 pm

If the mortgage interest is 6.5%, your APR should be 6.7%. Any higher and you are right to worry.

Colin
February 17, 2011 at 9:44 pm

If the PMI payments are included in the mortgage loan then yes the lender may write it out that way. However, I have not seen that done and I would have a long detailed talk with them to understand why they do it that way and then do the math yourself to see if the APR actually works out to that once PMI is added to the loan amount.