Rate versus APR

When viewing mortgage rates, you may have noticed that next to the mortgage rate is another rate, the APR. A federal law enacted in 1968 called the Truth in Lending Act requires that lenders disclose the APR that they are charging borrowers. The APR is the annual percentage rate, and how it differs from the rate is that it includes the fees and costs associated with the mortgage. The rationale behind this rate is to give the consumer a better idea of the true cost of borrowing. When looking for a mortgage you should always look at both numbers. The purpose of this blog post is to provide one specific and super important thing that you should focus on. You should subtract the APR from the rate, and the smaller the number, the better. For example, if you see a mortgage rate listed at 6.625% with an APR of 6.674%, the difference between the two is 0.049. That is a relatively miniscule number. That tells you that this lender does not tack on a bunch of fees and costs. I found these figures on a local credit union website, and that makes sense, credit unions generally charge less fees and costs to their members. If the rate was 6.625% and the APR was 7.625% or higher, for example, that should be an immediate red flag that the lender charges high fees and costs. When buying a home, your goal should be to negotiate the best price possible, and to find the lowest mortgage rate with the smallest associate costs. Oftentimes, lenders will advertise a low rate to attract borrowers, yet have huge costs that are only evident if the borrower pays attention to the APR. Always pay attention to the APR relative to the stated mortgage rate!