The Truth in Lending Act requires lenders to disclose the annual percentage rate of a loan at closing. The annual percentage rate or APR represents the true cost of the loan. Calculated based on a governmental formula, the APR considers the cost of loan fees amortized over the loan's life. This means that you can more accurately compare all possible loans to pick the best one for you. The decision to take out a mortgage is a big one for most prospective homeowners, and it is wise to consult the Boston real estate attorneys at Pulgini & Norton. We can help you evaluate the annual percentage rate and other loan terms.
The Annual Percentage Rate in a LoanWhen you take out a mortgage on a home, you not only need to pay back the principal, but also you need to pay back interest and the charge for taking out the loan, in the form of the APR. The APR is expressed as a percentage, and it includes not only interest but also the fees and costs involved in obtaining the loan.
There are three types of APR: fixed, variable, and tiered. Fixed APRs remain constant, while variable APRs can fluctuate even on a daily basis. Tiered APRs depend on the tier into which the loan falls, and they can go higher or lower depending on the borrower's current debt. In most cases, it is safest to go with a fixed APR, since you will always understand what you are paying.
While the interest rates and the total loan may be very close, each lender will have its own finance charges, which can result in different APRs and different total amounts being paid by the end of the loan period. The APR is usually calculated using the nominal interest rate, the loan period, and the amount financed. An APR should be greater than or equal to the nominal interest rate, except in rare cases.
To calculate a fixed rate loan, the lender uses the interest rate, the loan term (often 30 years), and loan-related fees. When an adjustable mortgage is at issue, there is an APR, but more speculation is involved. The total costs are not known until the loan closes, and so the APR is most accurately quoted at the end of the process.
In many cases, a loan with lower interest rate is a better deal. However, when comparing loans, you should look at both the nominal interest rate and the APR. A lender that offers a loan with a lower APR but the same nominal interest rate has offered you a better deal.
The APR spreads out the lender servicing costs over the whole life of the loan. This means that in the future if you need to refinance or sell your home, the mortgage may be more expensive. It can be particularly difficult to use the APR to compare adjustable rate mortgages because these vary based on interest rates in the future.
Consult an Experienced Boston Attorney for Your Real Estate NeedsAll lenders are required to follow the rules related to the APR in the federal Truth in Lending Act. Most buyers will need to take out a mortgage to buy a home, and it is crucial for them to understand the annual percentage rate and the true cost of the loan, so that they can make an informed decision. At Pulgini & Norton, our Boston real estate lawyers understand the home financing process. We advise and represent people in Somerville, Waltham, Andover, and other cities in Massachusetts. Call us at 781-843-2200 or contact us via our online form for a free consultation.