APR stands for Annual Percentage Rate. The APR is a great tool for first-time homebuyers because, in addition to including a loan’s interest rate, the APR also factors in other costs associated with getting a loan. In other words, by comparing APRs of various loan proposals a first-time homebuyer can more easily tell which offer is the lowest cost even if the interest rate and loan fees differ.
For example, if a home loan has a 5% interest rate and no loan fees the interest rate and the APR would both be 5%. However, let’s suppose that you have to pay a 1% loan origination fee on a $200,000 loan that has a 30 year fixed rate loan at 5%. The APR in this case would be 5.089%. The APR is higher than the previous example because the loan origination fee associated with taking out this loan effectively make it a more expensive loan.
Mortgage lenders are required to disclose a loan’s APR when you apply for a home loan as a result of the federal Truth In Lending Act (TILA). The actual document lenders use to disclose the APR is called a Truth In Lending Statement and is often referred to by mortgage lenders as a “TIL.”
While comparing APRs of your loan options is a good practice, it is only a fair comparison if the loan amount, loan term and the other terms of the loan are the same. For this reason, just because a loan offer might have a lower APR, does not mean it is a better offer. As with all financing decisions make sure you understand the terms of loan and are working with a reputable mortgage professional.
If all things being equal (other than the interest rate and loan fees), the APR is a great tool to help first-time homebuyers compare loan offers.