Our clients get disclosures from us and other lenders and continue to confuse their “APR” with their actual “Note Rate”.
The “Note Rate” is the actual interest rate we quote. The “APR” or Annual Percentage Rate” is often much higher than the rate quoted, as it is designed to reflect total closing costs. The APR weights your total closing costs as if they were interest charges; your closing costs are added to your annual interest charges, and your “effective interest rate” is then calculated. Or, to state it again, the APR is considered your “Effective Interest Rate” with closing costs added into the equation or added on to your interest.
The APR Disclosure prevents lenders from advertising unduly low interest rates without disclosing any unduly high closing costs that might be associated with such loans. APR calculations include almost ALL closing costs with the exception of some inspection fees and the appraisal fee.
FHA Loans tend to have APRs that are much higher than the Note Rate b/c of the high amount of Mortgage Insurance (including Up Front MIP) and Prepaid Escrows that get added into the APR calculation.
Lastly – I (Jay) will be on KQED’s (Public Radio’s) FORUM Radio Show from 9 to 10 AM at 88.5 on your FM dial. Feel free to tune in.
Call Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646