VA Loan Rate vs. APR
If you haven’t already seen it, you will soon; your Annual Percentage Rate, or APR. This number is one of the most confusing numbers on all the documents your lender provides and might also be the one number that your loan officer sometimes clumsily tries to explain. But really, the APR is quite simple when you understand the mechanics.
Some say that the APR is unimportant, that it’s just an insignificant number and to not pay any attention to it. But that’s only said by those who don’t understand its meaning. The Annual Percentage Rate is properly defined as “the cost of money borrowed, expressed as an annual rate.” That’s it. So what do you do with it? You use it to compare the same loan offering from competing lenders, in this instance a VA Loan from lender A and a VA loan from lender B.
The Note Rate is the first ingredient in the APR calculation. That’s the rate on which your monthly payment is based. If you have a loan amount of $100,000 on a 30 year fixed rate mortgage with a rate of 4.00 percent, your monthly payment is $477. Regardless of what your APR number might say, your payment is $477 with a 4.00 percent rate. So where does the APR come into play?
It comes into play when comparing two 4.00 percent 30 year loans from two different lenders. Both lenders can quote you the very same 4.00 percent rate on the same exact terms but the difference lies in certain closing costs associated with calculating the APR. A lender with lower closing costs will have a lower APR than a lender with higher fees.
Lender A’s quote of 4.00 percent with $5,000 worth of finance charges will show an APR of around 4.43 percent while Lender B may only have $2,000 of charges resulting in an APR of 4.17 percent. When lenders advertise their interest rates on the internet or in the newspaper, they are required by law to disclose not just the note rate, but the underlying APR as well.
This comparison only works when comparing mortgage offerings that are exactly alike with regards to note rate, term and loan type. You can’t compare a zero down VA loan with a 20 percent down conventional mortgage. It doesn’t work that way. But when used properly, the APR is an indicator as to which lender truly has the best offering.