What's an APR and What's It Mean for Your Home Mortgage Loan?

by Kelly Richardson
Loan Page Columnist

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One of the most common terms you will be exposed to when you apply for a home loan is "APR." The APR is the annual percentage rate of a home mortgage, and it's a critical part of the repayment formula. You should become familiar with some of the characteristics of the APR before you take on a new mortgage.

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The annual percentage rate of a home mortgage loan is the effective rate of interest on the money you will borrow to finance your new home purchase. The purpose of the annual percentage rate is to calculate the total annual cost of borrowing on your mortgage.

The APR and Your Home Mortgage Loan

The annual percentage rate is usually one of the aspects of a home mortgage loan that lenders will advertise most to borrowers. The APR is fairly simple to understand, and you should understand it before you go into negotiations with your lender.

» Comparison Tool: The annual percentage rate is used to give borrowers a way to compare the total cost of loans each year--not just the interest rates--as they shop around for a home mortgage.
» Rate Format: The rate format of the APR can be expressed in several different ways, designed to make a mortgage more attractive to borrowers.
» Other Costs: Another crucial aspect of the APR is such fees as the origination fee, or the amount you pay a lender in order to borrow money.

Limits of the APR on Home Mortgage Loans

There are quite a few limits of the annual percentage rate that you should be aware of before accepting a home loan offer. Just because the APR is a standard number, it doesn't mean that it is without faults.

» Total Cost of Borrowing: There are is an entire range of mortgage fees that are not calculated in the annual percentage rate. Excluded home loan fees are usually one-time fees paid to other interested parties (i.e. attorneys).
» Loan Retention: The annual percentage rate of a mortgage is issued with the assumption that borrowers will keep their home mortgage throughout its life. This usually isn't the case, which means the APR is not a true measure of the costs.

Some simple knowledge of APRs goes a long way when shopping around for a home loan.

About the Author
Kelly Richardson covers the local education and technology scenes in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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