# APR Cost Calculator

Which is a better deal, an interest rate of 5% and
no ender
fees or an interest rate of 3.5% and $5,000 in fees?

To help consumers compare interest rate offers, the Federal Government
passed a law in 1968 called The Truth in Lending Act (TILA). This
legislation requires lenders to use a formula called Annual Percentage
Rate (APR) to "blend" the interest rate with the lender's fees. The APR
rate is not the overall interest rate, but rather a comparison rate. For
example, a prospective home buyer could be offered an interest rate of
5% and no points or an interest rate of 4% and three points. If you read
the article on discount points, you know that mortgage points can "buy
down" the interest rate. However, the low interest rate is the result of
the discount points. Using the APR formula, blending the three points
into the 3.5% interest rate returns an interest rate of approximately
3.8971%. The APR rate of the 5% is 5% because the lender is not buying
down the interest rate with points or fees.

The APR rate is a good tool to weed out unscrupulous lenders who will
offer an exceptional interest rate, but fail to tell the consumer that
the low rate is due to points, fees, closing costs, and fees that lower
the interest rate. Again, the APR calculation takes into account all
lender fees.

The following APR rate calculator will not calculate the APR rate, but
rather, estimate the costs between lenders. This calculator is designed
for fixed rate mortgages. Adjustable rate mortgages have a unique APR
calculation and determining the APR cost is best left to mathematicians.
When you compare APR rates and costs, you must always compare the offers
equally. The term and number of payments must be the same.