What’s The “APR?”
The Annual Percentage Rate (APR) represents most — but not all — of the costs that will be charged over the projected life of a loan, costs such as interest and points.
One catch is that loans do not normally last as long as projected.
As an example, when points are paid, they are undervalued if APR calculations are based on a 30-year loan term but the mortgage ends in 10 or 12 years because the home is sold or the property refinanced. If a loan has an 8-percent interest rate with 2 points over 30 years, the APR would be 8.21 percent. If the loan only lasts 10 years, the APR would be 8.45 percent.
Another catch is that the APR does not include prepayment penalties, potentially thousands of dollars if the loan is paid off or refinanced during the prepayment period.
But, in an imperfect world, the APR is probably the best general measure we have to evaluate loan costs. At the very least, borrowers should review APRs when comparing loan alternatives.
In addition to the APR, always get loan quotes at “par” — the interest rate with 0 points.
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