## How Is The Annual Percentage Rate Calculated?

The annual percentage rate is calculated differently than the actual percentage rate of the mortgage loan.

• Let’s take a case scenario where a mortgage loan applicant applies for a 30 year fixed rate FHA loan of \$200,000 at a 4.25% interest rate
• The scheduled monthly payment will be \$983.99
• If we take two case scenarios where one is a borrower applies for a loan at Mortgage Company A for a loan amount of \$200,000 with a 4.25% interest rate and the cost associated with the mortgage loan of \$2,000, the APR is calculated by taking the original loan amount of \$200,000, less the cost of the mortgage loan of \$2,000 which yields \$198,000
• Let’s say both mortgage loan terms are 360 months and the monthly payment is \$983.33
• If we calculate the APR for this loan with Mortgage Company A, you take the net loan amount after deducting the cost of doing the loan, which is \$198,000 amortize it over 360 months with a payment of \$983.88 and run these figures in a mortgage calculator, the APR, annual percentage rate, will yield an APR of 4.33%
• We will now take case scenario two where the mortgage loan applicant applies for the same type of loan
• A \$200,000 loan with a 4.25% 30-year fixed-rate FHA loan of \$200,000 with a payment of \$983.99 with Mortgage Company B
• The costs associated with doing the loan is \$5,000 versus the \$2,000 with Mortgage Company A
• To calculate the annual percentage rate, APR, we need to take the original  loan amount of \$200,000
• Then deduct the cost associated with doing the mortgage loan, which in this case is \$5,000, where it yields \$195,000
• This figure is derived by taking the \$200,000 and deducting the \$5,000 cost associated by Mortgage Company B which the \$195,000 figure is derived
• Then input the \$195,000 loan amount, the \$983.99 payment, the 360-month loan term (30 years fixed rate term) into a mortgage calculator and you get a rate of 4.47% APR
• The annual percentage rate, APR, is a form of giving a form of the cost associated with getting a mortgage loan in terms of an interest rate and that is what an APR, annual percentage rate is

It makes it easier for a mortgage loan applicant to shop the costs associated with a mortgage loan with a particular rate when shopping from one mortgage company to another.

## Case Scenario APR Versus Interest Rate

We will now take another case scenario so our viewers can fully comprehend what an annual percentage rate, APR, is.

• Say a mortgage loan applicant gets a mortgage rate of 5.0% on a \$200,000 30 year fixed rate loan with the monthly payment being \$1,073.64
• The costs associated with doing this loan from Mortgage Company A is \$2,000
• To calculate this APR, we subtract the \$2,000 from the \$200,000 loan amount at the 5% interest rate over a 30-year term (\$200,000 minus \$2,000 yields \$198,000: input this figure in the loan amount in the mortgage calculator)  with a payment of \$1,073.64
• Then input these figures in a mortgage calculator and it yields an APR of 5.09%
• The APR Versus Interest Rate in this case scenario with Mortgage Company A is 5.09%

Now, in this second case scenario, our mortgage loan applicant goes to Mortgage Company B.

## Shopping For The Best Mortgage Rates

Our mortgage applicant applies for the same loan amount of \$200,000:

• But gets a 4.50% interest rate which is amortized over 30 years with a principal and interest payment of \$1,013.37 per month
• On the first case scenario, the monthly principal and interest payment was at \$1,073.64
• Let’s assume the cost associated with doing the second case scenario, the 4.5% interest rate loan is \$10,000 versus the \$2,000 charged by Mortgage Company A on the first case scenario
• If you input the second case scenario into a mortgage calculator; \$1,013.77, 4.5% interest rate, 30-year term, and \$190,000 loan amount (\$200,000 loan minus the \$10,000 cost), it will yield an interest rate of 4.95%
• The 4.95% is the APR, annual percentage rate
• Going with Mortgage Company B at a lower interest rate but 5 times the costs (\$10,000 costs associated with doing the loan), 4.95% APR, will yield a better APR than going with Mortgage Company B with the 5.0% interest rate of \$2,000

## Should I Go With Mortgage Company Offering The Lowest APR?

Going with the lowest annual percentage rate is not always the best fit for a mortgage loan applicant unless the mortgage applicant is planning on staying with the mortgage loan for the entire 30-year term.

Remember that the APR Versus Interest Rate is that APR is the upfront costs associated with obtaining a mortgage loan which is in an interest rate form

Homeowners who are planning on selling a home in three to five years, it is most likely best to go with the lower costs associated with getting a loan.  This is even with the higher APR because the chances are that they will not recoup the more upfront costs on a short term payoff mortgage loan