Finance
The annual percentage rate (APR) differs from the stated interest rate because APR:
AOnly includes the principal and interest
BIncludes the interest rate plus financing costs such as points and fees✓ Correct
CIs always lower than the stated interest rate
DDoes not apply to fixed-rate mortgages
Explanation
APR reflects the true cost of borrowing by including the interest rate plus other financing charges (points, origination fees, mortgage insurance, etc.) expressed as an annual rate.
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Key Terms to Know
Adjustable-Rate Mortgage (ARM)
A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Math Concepts
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