Q: Why is the annual percentage rate different from the interest rate for which I applied? Why is the "amount financed" different?
A: The "amount financed" is lower than the amount you applied for because it represents a net figure. If someone applied for a mortgage of $50,000 and their prepaid finance charges total $2,000, the amount financed would be shown as $48,000, $50.000 minus $2.000. The A.P.R. is computed from this lower figure, based on what your proposed payments would be. In a $50,000 loan with $2,000 in prepaid finance charges, and an interest rate of 14%, the payments would be $592.44 (principal and interest) on a loan with a 30 year term. Since the A.P.R. is based on the net amount financed, rather than on the actual amortgage amount, and since the payment amount remains the same, the A.P.R. is higher than the interest rate. It would be 14.62%. If this applicant's loan were approved he would still receive a $50,000 loan for 30 years with monthly payments at 14% of $592.44.
Q: What is the "annual precentage rate"?
A: The "annual percentage rate," or A.P.R., is the cost of your credit expressed in terms of an annual rate. Because you may be paying "points" and other closing costs, the A.P.R. disclosed is higher than the interest rate on your loan. The A.P.R. can be compared to other loans for which you may have applied and gives you a fair method of camparing price.