Finance
The annual percentage rate (APR) on a mortgage differs from the stated interest rate because APR:
AOnly reflects the principal balance
BIncludes the interest rate plus most lender fees, expressed as a yearly rate✓ Correct
CIs always lower than the stated interest rate
DExcludes escrow payments for taxes and insurance
Explanation
APR reflects the true cost of borrowing by incorporating the interest rate plus most lender fees and charges (such as origination fees, discount points, and mortgage insurance) expressed as an annualized percentage.
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Key Terms to Know
Discount Points
Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
EscrowA neutral third-party arrangement where funds, documents, and instructions are held until all conditions of a real estate transaction are satisfied.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
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.
Math Concepts
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