Annual Percentage Rate (APR)

The annual percentage rate states a loan's yearly cost including certain upfront fees, so loans with different rate and fee mixes can be compared. For cash on cash return the rate and fees count separately: the rate sets the payment, and fees add to cash invested.

Paying one point, $3,750, on the default loan at 7.25% gives an APR of roughly 7.35% over a full 30-year term. In the return calculation that point raises cash invested to $153,750 and trims cash on cash from 6.3% to about 6.2% unless it also buys a lower rate.

APR assumes the loan runs its full term. Investors who plan to sell or refinance in a few years spread those fees over fewer payments, so the true yearly cost is higher than the APR suggests. For short holds, compare the payment and the cash to close directly.

Further reading: Annual Percentage Rate (APR) on Wikipedia.