One of the most common questions that we get is what is APR, or why is my APR higher than my mortgage rate.

So I wanted to explain what APR is today and explain the difference between APR and your actual mortgage rate, which is also called the note rate.

I’m going to show you the spreadsheet that I use to send out estimates to people so I can play with the numbers a little bit and show you how this works. (In the video below)

The first concept to understand is that the APR is not the same thing as the note rate. The note rate in this example, a 30-year fixed loan of 3.75. 3.75 is your note rate and that’s how the principle and interest part of the payment is calculated. So in this example, this is a $600,000 home with 20% down so the loan is 480,000.

You’ll notice the APR is a little bit higher. The reason for that is that APR is a calculated number. What they do is they take some of the fees, for example, the underwriting fee, the title closing fee, there’s some other ones that are calculated within the APR number, they take those fees and they spread them out over the term of the loan, in this case 360 months or 30 years, and they say, okay, if that was also interest, then your interest rate would actually be 3.8. So that’s what APR is. It takes into account the total cost of the loan.

Another example I wanted to show you is if there’s monthly mortgage insurance. In this example, there’s not, but if you have less than 20% down, there’s going to be mortgage insurance. So let’s say, just use a number, I’m going to put a 0.3% factor, meaning 0.3% times the loan amount divided by 12 months is how much the mortgage insurance is per month, 120 per month. And you’ll see with the mortgage insurance on there, it pops up the APR because that calculates into the APR number. It acts as if the mortgage insurance is interest. And it says if that in fact were interest, then your actual rate would be 3.95.

This is a way to compare between lenders on the total cost of the loan. Another thing that affects it is discount points. So if there’s let’s say a 1% origination fee or discount point, $4,800, see how the APR is even higher yet 4.05. So all things being equal, this lender would be higher cost than one without points because the APR is higher.

So I hope that helps with your understanding of what APR is and how that differs from your note rate. If you have any questions, feel free to call me. I’m always here for you. 303-670-0137 or rbaxter@choicemortgage.com.  You can also text me and I hope you guys have a great rest of your day.

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