Getting an interest rate quote for a VA loan is relatively easy. There is no shortage of online portals that advertise VA mortgage rates. Yet trying to make sense out of them may not be so easy. When lenders quote rates online, they may quote a VA rate with points or no points, all with varying annual percentage rates, or APRs. But the APR can cause even more confusion. What is the rate, anyway, and why are there always (or should be, anyway) two rates posted?
VA lenders, and all lenders for that matter, are required by the Federal Truth in Lending Act to follow certain protocol when advertising mortgage rates. One of those requirements is posting the APR alongside the note rate. The note rate is simply the interest rate your VA lender will calculate your monthly principal and interest payments. Yet don’t confuse that rate with the APR.
The APR is the cost of money borrowed expressed as an annual rate. It’s supposed to be an easy-to-understand number that allows consumers to compare rates from different lenders. The APR includes not just the note rate but also other fees the lender requires in order to close the loan. Other fees such as origination charges, discount points and other allowable charges are included in the calculation.
The greater the variance between the note rate and the APR means the fees are higher associated with the loan compared to an APR that is just barely above the note rate. For example, two lenders offer a 4.00% rate for a 30 year VA loan. Lender A has an APR of 4.25% while Lender B quotes an APR of 4.50%. Because Lender B has higher fees, the APR is greater than Lender A. in this example, Lender A has the same rate but lower fees.
The APR can be a confusing number and many times a loan officer has difficulty explaining it. But it’s really not that complicated as long as the different lenders are quoting the same note rate on the same loan program.