The Annual Percentage Rate (or APR) is the total rate of interest on your loan amount that you’ll pay annually (averaged over the full term of the loan). APR is the annual cost of a loan to a borrower including fees. APR is expressed as a percentage like simple interest, however, it includes other charges or fees such as, loan origination fees, private mortgage insurance (PMI) most closing costs, discount points, etc.

One might ask what are discount points? Discount points are an upfront fee that you pay to the lender at the time you obtain your loan in order to lower the interest rate over the life of the loan. It is a means of buying down an interest rate on a loan. One Discount Point = 1% of the loan total. For example, One point on a $500,000 loan = $5,000.

Because APR includes fees, it’s a more comprehensive measure than interest rate alone. APR is typically expressed as a percentage of your total loan amount.

That said, your APR might equal your interest rate if your loan doesn’t include any other fees. Origination fees and points are included in the APR. Fees such as Appraisal, Title Insurance, Notary, and Escrow fess are not included in the APR.

Note that penalty fees, such as those for a late payment or a bounced check, are never included in the APR. So, your costs of borrowing could be greater if you fall behind on repaying your loan.

Andrea Augustson

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