I loved that b/c we work with all too many golden retrievers :).
Every lender is required to quote an Annual Percentage Rate, or APR. APRs differ from the actual interest rate quoted, or the rate that will be on the promissory note. This is b/c an APR represents the recalculation of a borrower’s rate with closing costs taken into account. These closing costs include lender fees, origination fees, escrow fees and mortgage insurance.
The formula used to calculate an APR is discussed here. It is confusing for consumers though b/c they often are not sure what closing costs should be included in the calculation. For the most part though, an APR represents what an effective interest rate would be if closing costs were added on to the total interest charges over the life of a loan.
APRs are higher than quoted rates b/c they include closing costs. They have been required since 1968, when the Truth In Lending Act was passed. APR requirements are necessary b/c without them lenders could advertise very low rates without having to indicate the effective cost of those low rates. Some lenders still play that game, however, by keeping the APR and closing costs in fine print (or in “fast talk” on radio ads).
B/c APRs are confusing and somewhat misleading for loans with Mortgage Insurance (especially with FHA loans), many borrowers focus less on APR nowadays and instead scrutinize actual rates and fees on their Loan Estimate and Closing Disclosure.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
