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What is the A.P.R.?
The APR does not affect your monthly payments. Your monthly payments are a function of the interest/note rate and
the length of the loan. The APR is a tool for comparing different loans, and is designed to represent the "true cost of
a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders/brokers 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 APR 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 APR does not clearly define what goes into the calculation, APR's can vary from lender to lender and loan to loan. The APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. Also, you'll see that APR'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. Always compare like loans i.e. 30 year fixed v.s. 30 year fixed.
So, APR's are at best inexact. The lesson is, that APR 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 APR will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Any fee on a Good Faith Estimate that has a check mark next to it and is under the PFC (Prepaid Finance Charge) column has been figured into the APR. So if the rates and terms are the same, the loan with the higher APR has higher fees associated with the loan. Always ask for A Good Faith Estimate.
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