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The Truth in Lending Act is a federal law that requires creditors to provide information to consumers about the terms and costs of a loan. The intent is to help consumers better understand loan transactions, and to assist them in comparing loans offered by different lenders. The law is administrated under a Federal Reserve board regulation known as Regulation Z.
One of the required disclosures that lenders must make in a mortgage loan transaction is something commonly referred to as the APR.
APR is an acronym for "Annual Percentage Rate". This term was specially designed to help consumers understand the relative cost of a transaction, and to guide them in their search for the best loan.
The concept of the annual percentage rate can be difficult to understand because it is based on a complex mathematical formula, which is prescribed in Regulation Z. What is important to understand though, is that the APR is a measure of the cost of credit expressed as a yearly rate.
The APR reflects the amount being financed, the interest rate, the timing of the payments, and other costs (prepaid charges) required as a condition of the mortgage loan that make up the finance charge. The finance charge, another required disclosure under the Truth in Lending Act, expresses as a dollar amount the costs associated with the loan, including interest and charges payable by the borrower such as points, loan fees, origination fees, application fees, and insurance, to name a few.
When the various components mentioned above are factored together using the APR formula, the APR can be calculated. Because the APR takes into consideration the various fees that are required as a part of the loan, the APR is often higher than the actual rate of interest for the loan.
Type of loan-----------------------Fixed rate
Initial Interest Rate-------------8.000%
Loan Term------------------------30 years
Amount of Loan-----------------$ 90,000.00
Total Prepaid Charges----------$ 2,673.27
Keep in mind that the APR is an artificial measurement of the relative cost of the loan transaction. It doesn't have a bearing on the actual rate of interest on a particular loan, but it does take the rate of interest into account. Your loan officer can calculate the APR of various loan programs for you and can explain why these differences between interest rates and APRs occur.
Because the APR expresses the overall cost of the loan as a percentage, comparing the APR of a particular mortgage loan with a similar loan is one way to measure the relative cost of the loans. This isn't the only factor to consider when getting a mortgage loan, but it can be very useful in helping you decide.
Be sure to take into account all of the other information that is provided to you by your loan officer including the interest rate and any fees or charges that you may have had to pay.
Just because an APR is lower on one loan than on another, it doesn't necessarily mean that particular mortgage loan is the best for you.
Consult with us. As your loan officers, we will help you to understand all of the costs associated with obtaining your mortgage loan and guide you on your way to purchasing or refinancing you home. Also, get on our mailing list, to receive any up-to-date mortgage news, and events.