The Federal Truth in Lending law requires that all financial
institutions disclose the APR when they advertise a rate. APR is
designed to present the actual cost of obtaining financing, by requiring
that the APR calculation include fees charged by the lender as a
condition to the extension of credit. These fees in addition to the
interest rate determine the estimated cost of financing over the full
term of the loan.
Fees for things like appraisals, title work, and preparation of loan
and closing documents are not included even though you’ll probably have
to pay them.
For adjustable rate mortgages, the APR can be even more confusing.
Since no one knows exactly what market conditions will be in the future,
assumptions must be made regarding future rate adjustments. When
the index rates are low, the APR may even be lower than the start rate
of the loan. This does not mean that the rate will drop in the
future, just that the current index (one year treasury or LIBOR index or
other usually short term rate index) rate is low.
You can use the APR as a guideline to shop for loans but you should
not depend solely on the APR in choosing the loan program that’s best
for you. Look at total fees, possible rate adjustments in the future if
your comparing adjustable rate mortgages, and consider the length of
time that you plan on having the mortgage.
Don’t forget that the APR is an effective interest rate-not the
actual interest rate. Your monthly payments will be based on the actual
interest rate, the amount you borrow, and the term of your loan.
For
additional information, please call Bill Meyers at 239-566-8484.
Explanation
of Annual Percentage Rate (APR)