APR Cost Calculator
Which is a better deal, an interest rate of 5% and
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.