Question:

How to figure annual percentage rate (APR) on your own?

Answer:

Borrowers need to know how to figure annual percentage rate (APR), if they want to choose the best loan terms. However, there are different things to consider when calculating annual percentage rate (APR).

What to be careful about when figuring annual percentage rate (APR)?

You'd better compare only loans with similar structure and maturity; otherwise your APR calculation may have confusing results.

If you wonder how to figure out the APR of an adjustable rate mortgage, you need to know that lenders use the starting interest rate of the loan, which is about to change many times during the lifetime of the ARM. The APR of an ARM cannot be calculated - it will always be changing.

To figure out APR of a fixed rate loan, find an online calculator and put in what you know about the loan so far - loan amount, loan charges, interest rate and amortizing period in months or years.

Let us assume that you need to borrow $250,000 and you have two quotes:

  1. $250,000 at 5.5%, with $5,800 closing costs for 20 years. The APR is 5.781%.
  2. $250,000 at 5.625% with $2,500 closing costs for 20 years. APR is 5.747%.

If you compare mortgages with different amortization period, you should know that loans with shorter terms have lower interest rate but higher APR and comparing loans with different longevity is not very practical.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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