When you are looking at loan programs, what is the difference between the APR and the Rate. Looks like the APR is always a little higher than the rate.
Thanks
JayDee
APR takes lender fees into consideratioin.
Ah I see. So that APR is what you are paying on the loan including all the costs to obtain the loan.
Thanks!
I found this some time ago and have used it with my clients. I am not sure where I found it, but, it explains it pretty well.
"The federal government requires lenders to quote APR because loans frequently are offered on different terms. To extend the inevitable fruit analogy, differing loan terms from different lenders can make it hard to figure out which offer is a sour persimmon and which is a real peach. APR helps you identify the peaches.
For example, you might get the following two quotes for $150,000 mortgages, each for a 30-year term:
Lender A offers 6.5 percent with the borrower paying no discount points and $5,000 in fees;
Lender B offers 6.25 percent with the borrower paying 1 discount point ($1,500) and $5,500 in fees, for a total of $7,000 in points and fees.
Lender B offers a lower interest rate (or “nominal rate”), but for $2,000 more in points and fees.
Which is a better deal? APR gives you a general idea.
Lender A’s offer has an APR of 6.83 percent, while Lender B’s offer has an APR of 6.71 percent. Since Lender B’s APR is lower, that loan is a better deal in the long run.
But that’s in the long run.
Consider the term
In the short run, Lender A’s offer might be better. A look at the examples above tells why.
Lender B’s offer carries a lower APR, but you, the borrower, have to come up with $2,000 more in cash. What if you don’t have the money, or you have it, but need it to buy appliances? In those cases, you might prefer the first loan, despite its higher percentage rate and APR.
Or what if you think you might move within a few years? Loan A costs $948.10 a month in principal and interest – $24.52 a month more than Loan B. So with Loan B, you pay $2,000 up front to save a little less than $25 a month. At that rate, it takes 82 months – more than 6.5 years – to recoup the $2,000. If you sell the house in less than 82 months, Loan A costs less.
On the other hand, if you plan to remain in the house for the life of the loan, “Don’t even look at the nominal rate,” . “What you really want to know is what the net effective cost of funds is, and that’s APR.”
APR takes into account some costs of getting the loan, including points, most loan fees and mortgage insurance. It does not take into account certain charges, including nonrefundable application fees, late payment charges, title insurance premiums, and fees for title examination, property appraisals and document preparation.
The federal Truth in Lending Act requires the lender to disclose both the nominal rate and the APR. The nominal rate can’t be stated more conspicuously than the APR."
That is “clear as mud”, right?
Haha. I get it. So what I SHOULD be looking at for a long term loan is the lower APR, but if I need a loan where closing doesn’t require as many up front costs, then there may be a loan with a higher APR, but may be the better deal for me.
Yes, clear as mud. ;D