City-Data Forum Difference between Loan Rate and APR? (insurance, interest rate, fees, refinancing)
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10-29-2012, 09:59 PM
 800 posts, read 2,898,196 times Reputation: 670

I'm refinancing my house and I was assured a 3% interest rate. Throughout the loan application and disclosure agreement, it indicates 3.000% as the interest rate. But then, I see a reference to the APR as being 3.323%. Is there some kind of 'bait and switch' going on here or are these two separate things? And what is the difference between them?

10-30-2012, 09:24 AM
 2,677 posts, read 4,179,546 times Reputation: 2263
Yes, they are separate things.

Short answer is that your rate is 3%. That will be used to calculate your monthly payment. But they are charging you a cost/fee that you will pay to get the 3%. Let's say that cost is \$X amount. How do you know that this is the best deal and bank B won't offer you a great deal at 3.05% but would charge you \$Y amount to get it? For you to be able to compare apple to apple, they convert it to APR that includes the 3% rate you are given and the \$X cost that they sell you the rate and it comes out to be 3.323%. That's the APR: rate plus cost to get that rate. As you come imagine, if they offer you a higher rate (greater than 3%) then the cost will be smaller (less that \$X).

Make sense?

10-30-2012, 12:32 PM
 4 posts, read 192,407 times Reputation: 17
Quote:
 Originally Posted by MeInDenudinFL Yes, they are separate things. Short answer is that your rate is 3%. That will be used to calculate your monthly payment. But they are charging you a cost/fee that you will pay to get the 3%. Let's say that cost is \$X amount. How do you know that this is the best deal and bank B won't offer you a great deal at 3.05% but would charge you \$Y amount to get it? For you to be able to compare apple to apple, they convert it to APR that includes the 3% rate you are given and the \$X cost that they sell you the rate and it comes out to be 3.323%. That's the APR: rate plus cost to get that rate. As you come imagine, if they offer you a higher rate (greater than 3%) then the cost will be smaller (less that \$X). Make sense?
OK, I see. Thanks!

10-30-2012, 12:33 PM
 Location: Austin 7,051 posts, read 16,728,931 times Reputation: 9385
The APR is the rate plus your fees calculated out for the first year. So it's like saying your rate is 3%, but for the first year it's actually 3.323% because of your closing costs. The fees would be loan origination fees, discount fees, and other lender fees. This is not third party closing cost fees.

10-30-2012, 04:20 PM
 4 posts, read 192,407 times Reputation: 17
Ok, great. So, it's only for the first year. It doesn't last through the life of the loan. That makes it much clearer. Thanks.

10-30-2012, 08:29 PM
 Location: MID ATLANTIC 7,556 posts, read 17,435,712 times Reputation: 8020
The APR was created solely for the consumer to have a measurement which lender is cheaper.

If lender A charged 2.75% and 3 points and lender B charged 3% with 0 points, both 30 year mortgages, which is the better deal?

The APR is nothing more than a shopping comparison tool. Certain items (loan origination fee, discount points, lender's title insurance, mortgage insurance to name a few) are required to be in the APR calculation.
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