What does the APR (Annual Percentage Rate) represent?

The Annual Percentage Rate (APR) is a crucial metric in real estate and lending, as it provides borrowers with a comprehensive picture of the actual cost of borrowing. This cost is not limited to just the interest rate applied to the loan; it encompasses other fees and costs associated with obtaining the loan. The APR expresses this total cost as a percentage of the loan amount on an annual basis, allowing borrowers to compare different loan offers more effectively.

For example, when a borrower is considering multiple lenders, one lender may offer a lower interest rate but might have higher fees associated with the loan. The APR takes these various factors into account, helping borrowers understand the overall cost of the loan beyond just the interest they will pay. This is why APR is considered the true cost of borrowing; it provides a holistic view that helps borrowers make informed decisions.

In contrast, the actual interest rate applied to the underlying loan amount measures only the interest portion of the loan without including additional costs, while a fixed rate pertains solely to the stability of the interest throughout the loan term. The lender's profit margin reflects their earnings on the mortgage but does not provide the borrower with the necessary insights into the total expenditures associated with the loan.