The Annual Percentage Rate (APR) expresses the actual cost of the loan as an interest rate. The ‘note rate’ is the interest rate base used to calculate payments. However, other finance charges are always added on. So the APR includes all charges to show what the actual cost of the loan will be expressed as an interest rate. The Truth-in-Lending form must disclose the APR.
Give me an example.
Say you take out a $200,000 loan with a 30 year term and a fixed interest rate of 7.5%. There are additional charges for closing, title, application and other items that total $5000. The $5000 will be spread out over the 360 payments and included in the monthly loan payment. Your monthly payments will be $1433.39. So if you calculate your interest rate in reverse based on the monthly payment, you will actually be paying the equivalent of 7.75% interest on the $200,000 loan amount.