In the example above, the first loan with more up-front costs is worth the lower interest payment only if a borrower holds the loan more than 10 years; if he moves or refinances in less than 10 years, the second loan with the higher APR would turn out to be a better deal. It may also be that a loan with a lower APR is worse in other ways; for example, some loans have a pre-payment penalty, which a lender charges if you pay off the loan early. But the APR is a good place to start when trying to evaluate the total costs of a loan. A lender estimates all the costs associated with a loan, as well as the APR, in a Good Faith Estimate (GFE). The APR is disclosed to the borrower through the Truth In Lending Statement (TIL) and is required to be sent to the borrower, along with the GFE within 3-days of applying to the lender for the loan.
Functional Definition of Orange County APR:
This is not the note rate on your loan. It is a value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. It works sort of like this, but not exactly, so use this only as a guideline: deduct the closing costs from your loan amount, then using your actual loan payment, calculate what the interest rate would be on this amount instead of your actual loan amount. You will come up with a number close to the APR. Because you are using the same payment on a smaller amount, the APR is always higher than the actual note rate on your loan.
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