Annual Percentage Rate (APR)

Definition of "Annual percentage rate (APR)"

Donald Rushworth real estate agent

Written by

Donald Rushworthelite badge icon

Berkshire Hathaway HomeServices

Annual Percentage Rate (APR) is a measure of the cost of credit that must be reported by lenders under the Truth in Lending regulations.

The Annual Percentage Rate (APR) takes into account the interest rate and upfront charges paid by the borrower, whether expressed as a percent of the loan or in dollars. It is usually higher than the interest rate because of upfront charges so that dollars paid by the borrower upfront carry a heavier weight than dollars paid in later years. The Annual Percentage Rate (APR) can be fixed or variable. The fixed ones are guaranteed not to rise during the life of the loan, while the variable can be adjusted for the time value of money in real time.

In principle, the Annual Percentage Rate (APR) should include all charges that would not arise in an all-cash transaction. In fact, only charges paid to lenders and mortgage brokers are included, and not all of those. No charges paid to third parties are included. Need examples? Title insurance and other title-related charges, appraisal, credit report, and pest inspection fees. Incomplete fee coverage means that the Annual Percentage Rate (APR) understates the true credit cost. If the understatement was consistent, this would not be a major problem, but it is not consistent. Fees that are not included in the APR are sometimes paid by the lender, in exchange for a higher interest rate. The APR in such cases indirectly includes fees that are excluded when paid by the borrower. Mortgage shoppers should not use the Annual Percentage Rate (APR) to compare loans where they pay settlement costs with loans where the lender pays the settlement costs.

What is an APR on an ARM?

We’re not playing charades. On an Adjustable Rate Mortgage, the quoted interest rate holds only for a specified period. In calculating an APR, therefore, some assumption must be made about what happens to the rate at the end of the initial rate period.

The rule is that the initial rate is used for as long as it lasts, and the new rate or rates are those that would occur if the interest rate index used by the Adjustable Rate Mortgage (ARM) stays the same for the life of the loan. This is a 'no-change' or 'stable-rate' scenario. Under a stable-rate scenario, at the end of the initial rate period, the interest rate used in calculating the APR adjusts to equal the Fully Indexed Rate. The FIR is the value of the interest rate index at the time the ARM was written, plus a margin that is specified in the note. When the Fully Indexed Rate (FIR) is above the initial rate, as it was during most of the 1990s, the rate increases on a no-change scenario. The Annual Percentage Rate (APR) is above the initial rate, even if there are no lender fees. When the FIR is below the initial rate, as it was during the first three years of the new century, the rate decreases on a no-change scenario. If not offset by high upfront fees, this can produce an APR below the initial rate.

 

Real Estate Advice:

The APR you will pay life for being stubborn and not calling one of our real estate agents is going to be huge. Don’t make the For Sale By Owner mistake!

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

The angle of a roof in relation to its horizontal axis expressed as a ratio of inches (cmm) per foot of horizontal distance. The sloping of ground, such as sloping ground away from the ...

Interest based on a 360-day year instead of a 365-day year. The former is referred to as simple interest and the latter is termed exact interest. The difference between the two types of ...

Privilege of a real estate investor or lender to participate in the profitability generated from property. This is in addition to any principal, interest, or dividends. ...

To fulfill , complete, implement, perform, or carry out terms of an agreement including completing a signature on a contract and delivering a document to the intended party. ...

First and foremost, the meaning of ‘punitive damages’ defines a financial penalty the defendant has to pay due to their negligent actions. The US legislative branch designed the ...

Appraisal approach where property values are estimated by comparing current comparable sales. See also market approach. ...

Unit of ownership in a real estate investment trust. ...

We know that the board of directors meaning defines a body of high executives who make significant daily decisions. But what is the definition of board of directors precisely? Typically, ...

maintenance procedures conducted to prevent later repairs and furthering a longer useful life. For example, many boilers and burners are cleaned and serviced each year before the winter ...

Popular Real Estate Questions