APR Calculator

APR Calculator

The banking costs of a loan involve more than just interest rates. When applying for a loan, it is common for lenders to charge fees or points in addition to interest. Hence, instead of merely focusing on interest, lenders should pay more attention to the annual percentage rate, or real APR, when considering the actual cost of a mortgage. The following two calculators help reveal the true costs of loans through real APR.

The APR is an all-inclusive, annualized cost indicator of a loan. It includes interest as well as fees and other charges that borrowers will have to pay.

Borrowers often confuse APR with the interest rate. The interest rate is the amount of compensation per period for borrowing money and includes the cost of principal only.

While valid, interest rates do not offer the accuracy needed to determine which rate from which lender amounts to the best deal. Since the APR includes both interest and fees, it addresses this challenge by factoring into the interest rate and other additional costs associated with the loan.

In the U.S., the Truth in Lending Act requires lenders to display APRs so borrowers can easily compare lending costs between competitors. Of course, every lender is different, and the fees listed below will not apply to every loan. For this reason, prospective borrowers should ask lenders to list out all added costs packaged into individual APRs to understand a specific loan. For mortgage loans in U.S., APRs may include fees such as:

Fees usually exempt from the APR of a mortgage loan include:

• Appraisal fees
• Survey fees
• Title insurance and fees
• Builder Warranties
• Pre-paid items on escrow balances, such as taxes or insurance
• Intangible taxes

Limitations of the APR

While the APR serves as an excellent indicator for loan comparisons, the listed fee structure presumes that the loan will run its course. For any borrower planning to pay their loan off more quickly, the APR will tend to underestimate the impact of the upfront costs.

For example, upfront fees appear significantly cheaper spread out over a 30-year mortgage compared with a more accelerated 10-year repayment plan. In the U.S., borrowers usually pay off 30-year mortgages early due to reasons such as home sales, refinancing, and pre-payments. Therefore, when comparing loans with the same APR, the loan with lower upfront fees is more favorable to borrowers intending to pay off a mortgage early.