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What is the difference between the interest rate and the A.P.R.?
You'll see an interest rate and an Annual Percentage Rate (A.P.R.) for each
residential loan you see advertised. The easy answer to "why" is that
federal law requires the lender to tell you both. The APR only applies to
residential loans on owner occupied property and does not apply to
commercial loans.
The A.P.R. is a tool for comparing different loans, which will include
different interest rates but also different points and other terms. The
A.P.R. is designed to represent the "true cost of a loan" to the borrower,
expressed in the form of a yearly rate. This way, lenders can't "hide" fees
and upfront costs behind low advertised rates.
While it's designed to make it easier to compare loans, it's sometimes
confusing because the A.P.R. includes some, but not all, of the various fees
and insurance premiums that accompany a mortgage. Federal law requires
lenders to disclose the A.P.R. but unfortunately the APR can be misleading
as it does not clearly define what goes into the calculation and it can vary
dramatically based on per diem interest or other minor variables.
APR is also misleading because it does not disclose balloon payments,
prepayment penalties or the duration of the fixed rate. So, A.P.R. is at
best inexact. The lesson here is that A.P.R. can be a guide, but you need an
Empyrean Funding mortgage professional to help you find the best residential
loan for your specific needs!
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