Q: I notice how many mortgage companies mention an interest rate and then an APR (annual percentage rate) a bit higher.
How is this annual percentage rate calculated? Is it simple or is it a computer calculation? Which rate would I really pay? — R.T.
A: Let’s say you take out a loan for which you’ll be paying 4.5 percent interest every year.
But the lender also requires a bit of extra interest, just once, at the beginning.
If he wants you to pay an extra 2 percent of the loan up front, you’re being charged two points.
In all, you’re really paying slightly more than 4.5 percent.
How much more?
As you suspected, a computer is the best tool for calculating the true annual percentage rate.
Federal law requires it to be disclosed, so you can compare different loan offerings.
In practice, it mostly just confuses people.