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APR stands for Annual Percentage Rate. Basically, it means the true cost of borrowing. This includes the interest rate plus all additional cost. Additional Cost usually includes points, pre-paid interest rate, loan processing fee, underwriting fee, document preparation fee, mortgage insurance, loan application fee, closing fee, and title fee.

APR remains controversial as each mortgage lender calculates differently. Lenders, bankers, mortgage brokers, and borrowers easily get confuse on calculation. By law, the mortgage lender must provide or disclose the APR to the borrower or mortgagor.

Steps to calculate annual percentage rate (APR)

- Sum up all the additional cost.
- Calculate the monthly mortgage payment.
- Calculate the APR using the total additional cost and monthly mortgage payment.

Monthly mortgage payments

Suppose the mortgage lender lends 0,000 with 6.5% interest rate, 2 discount points, and ,200 additional cost on 30 year mortgage, the regular monthly mortgage payment equals ,580.17. Payment equals [P(1 + r)nr]/[(1 + r)n - 1] where P means principal, r means interest rate, and n means number of period. With discount points and additional cost included, your effective monthly mortgage payment equals 19.36. Effective Payment equals [(P + a + (P * d))(1 + r)nr]/[(1 + r)n - 1] where P means principal, a means additional cost, d means discount points, r means interest rate, and n means number of period.

Annual Percentage Rate (APR)

Now, the Annual Percentage Rate calculations equals to 6.75%. APR equals [(a + (P * d)) / (P - a - (P * d))] * 10 + r where P means principal, a means additional cost, d means discount points, and r means interest rate.

About the Author: Dennis Estrada is a webmaster of mortgage calculators which include general purpose calculators and tools for mortgage and real estate.