A.P.R. vs. Interest Rate – What’s the difference?

You’re most likely to encounter low interest rates and low annual percentage rates (A.P.R.) on television commercials or newspaper ads as lenders vie for the attention of potential borrowers. As Jerry Seinfeld says “Ahhh, the timeless art of seduction.” But buyer beware, not all that glitters is gold.

A.P.R. was created to provide a way for borrowers to account for costs associated with the mortgage. This sounds good because it may not be very easy to choose between a loan with a lower rate and higher fees or a loan at a higher rate with low fees.

Although APR is supposed to be a shopping tool, it’s an inaccurate tool at best. 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. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.

Another problem with APR is that it is calculated over the life of the loan, even though over 90% of all borrowers sell their house or refinance their mortgage before term. This can lead borrowers with relatively short time horizons astray.

For more helpful advice on A.P.R. and interest rates check out these articles:

http://www.mtgprofessor.com/A%20-%20Mandatory%20Disclosure/does_the_apr_help.htm

http://credit.about.com/od/regulatory/a/041305.htm

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Brian Daniel is a loan officer for www.bendmortgagegroup.com., a mortgage company in Bend, Oregon. He is also the company's marketing coordinator. For more articles visit www.bendmortgagegroup.com/Articles.