APR versus Note rate

Most people are confused when they compare and contrast the differences between the Annual Percentage Rate (APR) and the actual Note Rate. 

The Note Rate refers to the rate being quoted to you by your mortgage provider for the loan you are about to receive.  When you are making inquiries for obtaining a mortgage quote the rate that will be quoted to you is the Note Rate, not the Annual Percentage Rate.

The Note Rate will normally be quoted in increments of one-eighth of a point.  For example, you might see an advertisement about rates being quoted at 6.00%; on another day you might see a rate being quoted at 6.375%.  If the rate you are considering does not fall within the one-eighth of a point increment then odds are it is either being quoted incorrectly or it is not the Note Rate.

The Annual Percentage Rate (or APR) is the true rate of your loan.  This rate will always be located on the “Truth and Lending Statement”, where you should see that the APR rate is in fact higher than the calculated Note Rate.  Annual Percentage Rates are calculated by adding in all of the upfront costs associated with the loan and the current Note Rate. 

The APR can be a valuable tool for comparison of the different loan products and therefore should be a top consideration before the final selection on your mortgage.  If calculated correctly the APR will give you the true comparison between one loan and the other, by including all the closing costs into the calculations.  Typical closing costs used to calculate the Annual Percentage rate on a loan include (but are not limited to) Credit Report fee, Processing fees, Underwriting fees, Title fees, Mortgage Insurance fee, Appraisal fee, and Loan Origination fees.  In essence, any fee that is added to the loan to cover any closing costs needed to complete the transaction.

Note rates that are offered on your loan will generally be lower than the Annual Percentage Rate, because note rates do not include the actual closing costs on a loan.

A good broker will be able to explain this in its entirety to you and you should expect nothing less.