`Annual percentage rate' a clearer mortgage gauge than `interest'

By , Special to The Christian Science Monitor

What does the annual percentage rate (APR), commonly used by the mortgage-lending industry, really mean? Simply put, the APR involves the conversion of all the finance charges associated with the loan to a yearly percentage figure.

``The APR, according to the federal government, is a better gauge of the cost of obtaining credit'' than the interest rate alone, says an accountant in Austin, Texas, because it takes into account the other costs of financing a loan besides the interest rate.

These additional costs include processing fees, private mortgage insurance premiums, prepaid interest, broker fees, loan-origination fees, and discounts paid by the borrower.

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As an example, say you need to borrow $50,000 to buy a house and the lender offers you a 30-year, fixed-rate loan at 12 percent. After making the down payment on the house, you may not have any money left to pay for the additional costs of the loan.

The lender subtracts the amount of the added costs, or $3,000, from the loan amount, thus giving you $47,000 instead of $50,000. In repaying the loan, however, you pay back the full $50,000, plus interest, even though you only received $47,000.

Depending on the amount of the extra costs, it could mean a one-half to three-quarters of a point increase in the effective rate on the loan. So instead of paying 12 percent interest, you end up paying 121/2 percent or more.

On an adjustable-rate mortgage, the APR is figured on the note rate of the mortgage at the time the loan is taken out, and before any future adjustments to the rate.

The adjustments, whether made annually, every two years, or every six months, are not considered in computing the APR.

On all real estate transactions, under the federal truth-in-lending laws in effect since 1969 and amended in 1982, lenders are required to disclose what the APR will be. It must be computed to the nearest eighth of a percentage point.

Ask your loan officer to explain the APR fully before you sign any papers. The officers at lending institutions want you to know what the charges are so you will not have a disputed loan agreement later on.

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