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“I thought the rate on our mortgage was going to be 6.5%,” Jack said. “What’s this APR thing for 6.875%?”
Ann peered over his shoulder and glimpsed the paperwork he was studying. “Yeah, I had the same question,” she said. “Let me see if I can remember how Jason at the credit union explained it.”
Jack rolled his eyes. “In your own words, please honey. Okay?”
Ann laughed. They’d both found Jason amusing and annoying at the same time, with his lengthy explanations of every paper they signed. “At least he cares enough to explain everything, right? Anyway, we’re borrowing $225,000 to buy the house, and our interest rate is 6.5%, right?”
“I’m with you,” Jack told her.
“Great. But besides the interest rate, we’re also paying certain fees to get the loan.”
“Well, in order to compare apples to apples, we get a number that includes both the interest rate AND all the fees, as a percentage. That way, we’ll know exactly how much we saved by going with the credit union.”
“Kind of like comparing the unit price on groceries?”
“Yeah. The Annual Percentage Rate – or APR – takes all the fees we’re paying and adds them to the interest rate. It’s the true cost of our loan.”
The Annual Percentage Rate (APR) is the yearly cost of a loan, including interest, insurance, and the origination fee (points), expressed as a percentage. It’s usually applied to mortgages, credit cards, and automobile financing.
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