What Is Annual Percentage Rate (APR) And How Does It Work In Real Estate?

During the mortgage process, home buyers typically hear and see many terms from lenders – and one of those terms is APR, or annual percentage rate. Like the interest rate, the APR provides a borrower with an accurate measurement of the loan’s cost, but in the case of APR, it’s annually.

Before you commit to a lender and a particular loan, it’s important to know what APR is exactly and how it can affect your future mortgage payments. By recognizing the best APR offer for your finances, you can set yourself up with an affordable mortgage loan.

What Is APR?

APR represents the yearly cost of borrowing money and interest rate plus additional fees.

APR provides the best measure of how much borrowers pay for mortgage loans each year. It’s an even more effective tool than the interest rate of measuring your loan’s annual cost.

Why? Because your APR doesn’t just include how much you’ll pay in interest for your mortgage. It also includes several other fees, to give you the total cost – not just the amount of interest you’ll pay – of your loan.

APR Vs. Interest Rate

The biggest difference between your loan’s APR and interest rate is that the APR includes both  interest rate and any fees that your lender and other providers charge while originating your mortgage. An interest rate doesn’t include any fees but represents only the cost of borrowing money from a lender.

Because your APR includes lender fees and represents your rate for the year, it will always be higher than your mortgage’s interest rate and provide a more accurate view of how much your mortgage costs.

What Does APR Include?

When shopping around for the best APR, it’s important to remember that every lender is different and likely won’t apply the same exact fees to the same loan. The fees that factor into your APR usually include:

• Base interest rate: Your lender will charge you interest on the money you borrow and will use that interest rate when calculating your monthly payments. The higher your rate, the higher your monthly payments.
• Document preparation fees: Your lender usually charges fees for preparing the documents that you’ll sign at your loan’s closing.
• Underwriting fees: Underwriting fees cover the costs of the research that your lender’s underwriters perform when determining if you’re willing and able to cover your new mortgage payment. Underwriters will review your credit score, bank statements, W-2s and paycheck stubs to verify your income and history with paying your bills.
• Origination fee: The origination fee is the money you’ll pay your lender for the work they do to process and fund your loan application.
• Closing costs: Closing costs include all the fees you pay to your mortgage lender and the third-party providers – including title insurers, real estate attorneys, inspectors and appraisers – that work on drafting your new mortgage.

To find out what APR you qualify for, it’s important to apply for a mortgage early on in the home buying process. Not only will this help you learn about your monthly payments, but it’ll guide the price range you should stay within while house hunting.