Real Estate

Do Borrowers Really Understand a Mortgage APR?

Do Borrowers Really Understand a Mortgage APR?As part of obtaining a mortgage, a borrower will be presented with many documents, one of which is the Truth-in-Lending, also known as a TIL. The TIL will list the mortgage rate being quoted, as well as, the annual percentage rate, commonly referred to as the APR. It is also a Federal law that lenders show both the mortgage rate and APR when advertising which prevents lenders from hiding fees. While this percentage is an important piece of information, do borrowers really understand a mortgage APR?

What is APR?

The APR is the annual cost of credit which is calculated as a percentage. It is intended to be a tool by which borrowers can compare different mortgage offers before making a final decision. The APR is almost always higher than the actual mortgage rate of the loan because it includes the interest rates, origination fees, any points, broker fees, mortgage insurance premiums, prepaid interest and any other lender fees that a borrower is obligated to pay as part of the mortgage. However, the APR does not include fees from third parties, such as costs for appraisal, title and inspection, if needed.

There are some tricky aspects to the APR. It is calculated based on the entire term of the loan, such as 30, 15 or 20 years, and with the assumption that the mortgage will never be refinanced. For this reason, borrowers should never compare quotes and APRs for different term loans.

The resulting APR for an ARM (adjustable rate mortgage) is calculated based on the assumption that the mortgage is adjusting at the present time and at the current interest rates since future rates at the time of adjustment are not known. It is not really possible to predict how an ARM will adjust over the entire term of the loan or whether rates will increase or decrease. Due to this, comparing the APR from lender to lender is not dependable since each lender may be use a different ARM adjustment for purposes of the ARM APR.

Another drawback to the APR is that it does not consider that the mortgage will be refinanced, that the home will be sold or that extra payments may be made to the principal balance. While this percentage is designed to give a borrower the true cost of the loan, the actual length of time that a borrower holds the mortgage will really determine the final costs and will tend to be more accurate.

Comparing Loan APR

If a borrower chooses to use the APR to compare mortgage offers, then the lender must give the borrower the details of what fees are included in the APR in order to make a true comparison. Since the costs of a loan will differ from lender to lender, the APR will ultimately be different. When there are one-time charges that a borrower pays upfront, the cost of the loan increases, however, the APR calculates these charges over the entire life of the loan which can result in a lower APR.

Because the APR can be quite confusing, it should not be the deciding factor when obtaining a mortgage. It is better for the borrower to look at the entire mortgage including its costs and terms. Examining the Good Faith Estimate line by line will produce a better comparison of the costs included in the loan. Bear in mind, that each time the mortgage is negotiated or altered, the GFE will also be updated. In addition, the exact costs of some fees are not known at the time of application and may also change the APR prior to closing.

Despite all of the safeguards available for borrowers to make a good mortgage decision, the best mortgage will be the one that the borrower is happy with, satisfied with the mortgage rate and costs, and can live with for a long period of time.

Author Bio: Rosemary Rugnetta has been writing since 2010 for, a company that matches consumers with banks and lenders offering low mortgage rates. Previous to her writing career, Rosemary spent 13 years working hands-on in the mortgage industry as a mortgage loan analyst, mortgage processor, mortgage underwriter and property manager.

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  1. June 4, 2013 at 7:12 am — Reply

    I think most borrowers do not understand the ins and outs of mortgages, including what APR truly stands for. Like you said in conclusion, the best mortgage is one that the borrower is happy with and can financially handle.

    • June 6, 2013 at 1:03 pm — Reply

      I can attest that most people don’t understand mortgages. I was a mortgage collection agent for a few years.

  2. June 4, 2013 at 7:40 am — Reply

    I’m not sure that most borrowers understand much of what is in their mortgage. I would say that most don’t bother to read 95% of it. Now that the housing crisis appears to be over, I hope people have learned from their mistakes.

    • June 6, 2013 at 1:03 pm — Reply

      I am sure that most people still don’t read their mortgage documents.

  3. June 4, 2013 at 7:52 am — Reply

    While you can’t use the APR to make comparisions between different kinds of products, and there are certainly many other factors you should consider, I don’t think ignoring the mortgage rate is the answer.

    • June 6, 2013 at 1:04 pm — Reply

      It should just be another factor in the decision making process.

  4. June 4, 2013 at 8:52 am — Reply

    As with most things, there are good rules of thumb to follow but true understanding only comes with mastering the details. I’ve never had a mortgage so I honestly don’t know much about the ins and outs, but it’s not surprising that a single number can’t sum up an entire mortgage contract. Thanks for the helpful things to think about.

    • June 6, 2013 at 1:05 pm — Reply

      There are so many facets to a mortgage and the rate is just one of them, but it is what is “sold” to the consumer.

  5. June 4, 2013 at 9:24 am — Reply

    Like others have said, I am not too certain that many borrowers understand APR along with everything else that goes in their mortgage. Buffett claims that mortgage paperwork should be one sheet and that would end confusion and make it very black and white. Ultimately, though, I think it comes down to one that the borrower can afford and are comfortable with.

    • June 6, 2013 at 1:06 pm — Reply

      I like the one sheet idea. It was be easy to read and not have lawyer speak in it that even confuses the hell out of the lawyers.

  6. June 4, 2013 at 10:07 am — Reply

    I agree with the others, many do not understand most aspects of their mortgage. Some of my friends have no clue what their interest rate is.

    • June 6, 2013 at 1:08 pm — Reply

      That is crazy that they have no idea what their interest rate is. It is so easy to find out.

  7. June 4, 2013 at 11:16 am — Reply

    Just like everyone else. The majority of people do not know what their mortgage entails. They rely a lot on others.

    • June 6, 2013 at 1:08 pm — Reply

      Relying on others doesn’t help much with your mortgage. If you rely on a lawyer or agent to tell you what it is all about, you will be clueless!

  8. June 4, 2013 at 2:51 pm — Reply

    APR is difficult to understand even for lenders. Of course the mortgage should be considered in a comparison, but what if you are offered a very low mortgage rates and the fees are high vs. a slightly higher mortgage rate and the fees are low? In many cases, the higher rate with lower fees will turn out to be the cheaper mortgage.

    • June 6, 2013 at 1:09 pm — Reply

      It is sad to that APR is hard to understand even for the people dishing it out. The system needs to be fixed.

  9. Jake @ Common Cents Wealth
    June 4, 2013 at 3:08 pm — Reply

    I don’t think most consumers understand a lot about the home buying or selling process. Hopefully they get paired with a good Realtor and Mortgage Company who can explain it to them. We just refinanced our home 6 months ago, so I got a crash course into APRs and different loans. I think we ended up getting the best one for us, but it definitely gets confusing.

    • June 6, 2013 at 1:10 pm — Reply

      If you can find someone that will take the time to explain it, then you will be better off. I think some might get the explanation, but have no idea what it really means.

  10. June 4, 2013 at 6:42 pm — Reply

    “Because the APR can be quite confusing, it should not be the deciding factor when obtaining a mortgage. It is better for the borrower to look at the entire mortgage including its costs and terms.”

    Why not just recalculate the APR for the term you expect to hold the mortgage and do the same for other loans you’re comparing?

    • June 6, 2013 at 1:10 pm — Reply

      Most people don’t know how to do basic math…..

  11. June 4, 2013 at 8:11 pm — Reply

    Great stuff, Rosemary. All potential home buyers should know this info. Not understanding APR is a great way to get ripped off on your mortgage.

    • June 6, 2013 at 1:11 pm — Reply

      You are so right Laurie. I think many people have been ripped off by their mortgage.

  12. June 4, 2013 at 8:29 pm — Reply

    Wouldn’t it be nice if it could all be presented as you pay x amount per month for x months for a total of x? That would make comparisons a bit more simple I think. I guess it won’t be that way, so it is to the buyer’s advantage to be educated about the specifics of their mortgage.

    • June 6, 2013 at 1:11 pm — Reply

      I like the idea of going simple. It is a complicated process, but it really doesn’t have to be.

  13. June 4, 2013 at 9:53 pm — Reply

    I never quite understood the difference between apr and interest rate, but this helps. I didn’t know you can’t compare apr of different term mortgages.

    • June 6, 2013 at 1:12 pm — Reply

      Glad this helped you out.

  14. June 4, 2013 at 10:26 pm — Reply

    I don’t think MOST borrowers know the difference between interest rate and APR. People LOVE to boast how low their rate is…I’m not 100% sure they would notice that they’re paying thousands of dollars in order to get that low rate. The TIL has definitely helped though.

    (I used to close mortgage loans and it was so alarming how many people only focused on the interest rate).

    • June 6, 2013 at 1:13 pm — Reply

      I used to collect delinquent mortgages, so I have heard some things and seen crazier things.

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