APR Versus Note Rate

WHAT IS THE APR (Annual Percentage Rate)?

There is almost always a difference between the initial note rates and annual percentage rate you will be quoted on your good faith estimate. Here we will look closer at exactly what the note rate is and what the APR or annual percentage rate is.


The Mortgage Interest Rate is a fee, paid on borrowed capital. The interest is calculated upon the value of the assets in the same manner as upon money. Interest can be thought of as “rent on money”. For example, if you want to borrow money from the bank, there is a certain rate you have to pay according to how much you want loaned to you.

The fee is compensation to the lender for foregoing other useful investments that could have been made with the loaned money. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The amount lent, or the value of the assets lent, is called the principal. Mortgage Interest or note rates are therefore the price of credit, not the price of money as it is commonly – and mistakenly – believed to be.

The percentage of the principal that is paid as a fee (the interest), over a certain period of time, is called the interest rate.The note rate is the actual interest rate being charged to your principle balance. It is generally amortized over 30 years (360 months). A good way to reduce the total interest you pay over the life of the loan is to amortize it over a shorter period such as a 20 year loan (240 months), a 15 year loan (180 months), or 10 years (120 months). By lowering the term of the loan you greatly decrease the total interest you pay over the life of the loan.

APR (Annual Percentage Rate)

Annual percentage rate (APR) is the effective interest rate the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed. In other words the APR is the total cost of credit to the consumer, expressed as an annual percentage of the amount of credit granted. APR is intended to make it easier to compare lenders and loan options.

The problem with this is that not all lenders are including the same “other” costs into their APR figures thereby further confusing the client about how to compare accurately several offers. As a guideline a savvy buyer should be sure to ensure that the following costs are included into all APR figures disclosed on a GFE:

• Points

• Pre-Paid Interest

• Origination Fees (including loan processing, underwriting and document preparation attorney and notary fees

• closing agent document preparation fees

• PMI (private mortgage insurance)

• Application Fees

What you won’t generally see included in the APR figure is:

• Appraisal

• Survey

• Home Inspection

• Credit Report Costs

• Title Fees

Lenders are required to disclose the APR before the loan (or credit application) is finalized. The homeowner should use this information to your advantage and ensure that you compare each loan quote with all figures included so that you can get a true sense of which Mortgage Company is providing you with the best offer overall.

We hope that you find this information useful in comparing the difference between the initial note interest rate and the annual percentage rate!

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