Annual Percentage Rate is the cost of a loan including certain closing costs expressed as an interest rate. The Theory
behind this is to evidence the effective rate of financing the purchase of a property. By using one number rather than
rate and closing costs separately (which is how it really works) the intent is to provide an easier manner by which you can
compare one loan to another.
The problem with this is that APR is calculated on the entire length of the loan. On average, mortgage loans are only used
for about 3.3 years before being refinanced or paid off by sale of the property. As a result, using APR to decide what's
best is like judging a book by its cover.
Calculating the real cost or True Percentage Rate© reveals the secret to making the best choice for the time period that
YOU expect to have your loan. Remember, the number of years you indicate is not how long you expect to own the
property, it's how long you expect to have this particular loan. Owners refinance their loans often and for various
reasons. Rate changes, term changes, cash out for improvements, college costs, even things we'd rather not think about
like job loss and divorce all come into play. Choosing wisely, based on real total cost rather than just interest rate is the
smart way to come to the best conclusion.
|