Real Annual Percentage Rate Calculator
To discover the real APR of your loan, enter your loan amount, interest rate, points, additional costs, and year-length term below.
The Lowdown On Mortgage APR
-And why it's so important to homeowners
You've probably heard the term APR if you've been shopping for a home, and you may even know what the acronym stands for: Annual Percentage Rate.
But do you really understand the concept, and how it differs from the interest rate on your mortgage?
The APR is a complex mathematical equation designed to make life easier for borrowers, and the government insists that lenders make the information available, literally in the same breath as the interest rate.
When you apply for a mortgage, the lender must make you aware of both figures — the attractive interest rate, and the more realistic APR. The law even goes so far as to forbid the lender from emphasizing one rate over the other.
It's up to you to listen closely to both numbers in order to fully understand the debt obligation you're about to take on. The APR is a simple way of comparing different deals offered by different lending institutions, or even different options from the same lender.
What Exactly Is the APR?
The cliche is that comparing different offers from different lenders is often like trying to compare apples and oranges; you need a separate yardstick for each. The APR is like a pair of magical glasses through which all lenders and financing deals are seen on an equal field.
If you picture all your prospective lenders lined up in a row, they will all have shiny offers to tempt you. Some will have lower rates, but add points; some will offer no points and low interest, but higher fees; still others will try and dazzle you with bait-and-switch tactics, misleading claims and pie-in-the-sky promises.
Your federally-approved APR glasses allow you to see through the glare, the bling and the bells and whistles, so you can see what these offers really mean to your pocketbook and your future. Now you can easily compare offers from several lenders side-by-side, even if they appear to be different animals (or types of fruit).
How Is APR Calculated?
As you might imagine, the calculation is complex, involving mysterious algorithms and factors you could never imagine. The APR takes into account origination fees, mortgage insurance and the points you incur.
More importantly, it lets you see your money's real buying power and answers the question on every home buyer's mind: Is it worth it to pay more up front in exchange for a lower rate?
Let's find out how two different mortgage offers measure up, courtesy of the above tool, for the same 30-year $300,000 note.
The first lender is Mr. Goodbank, with a 6.5% offer with no upfront points, and $5,000 in fees. Each point is equal to 1% of the principal.
Lender B is Mr. Betterbank, offering 6.25% but asking for one point as part of the deal, with $5,700 in additional fees. By entering these numbers, we see the following side-by-side comparison.
Mr. Betterbank's 6.25 interest rate, often called the nominal rate, coupled with one point and $5,700 in fees turns out to be the better deal with a monthly cost of $1,900 (compared to $1,927 in the higher-interest Offer A).
The lower APR of 6.55% indicates that Offer B is the better deal.
APR Vs. Interest Rate
The interest rate is the cost of borrowing money, whereas the APR is what your debt actually costs on a yearly basis, with all the interest, closing costs, points and origination fees figured in. It does not include application fees, late payment penalties or fees for property appraisals and document preparation.
What's the difference between interest rates and APRs? An APR is intended to give you more information and a clearer picture of what you're getting into, to make shopping for financing more comparable.
Looking back at our Offer A and B comparison above, the latter offer has a lower APR and lower payments — but wait there's more.
Time is always the fourth dimension and an important variable when figuring payments and amortization schedules. Also, time is money.
While Offer B seems like the sweetest deal, what if you don't have the extra $700 cash that it requires, or the upfront money to cover the points? What if you only plan to live in the house for a short time, and won't have enough time to make back the upfront costs?
As a rule of thumb, the APR is a good barometer of your financial future if you plan to keep your house for the entire 30-year term.
Limitations on Annual Percentage Rates
APR limitations are regulations set forth by the federal government to protect the consumer against exorbitantly high rates and the unscrupulous lenders who try to fleece borrowers or get them into amortization schedules they can barely keep up with.
Both the APR and the surrounding limitations are valuable tools geared to protecting the consumer, and making the confusing world of finance a little easier to understand.