What is an Annual Percentage Rate (APR)?The annual percentage rate (APR) is an interest rate that reflects the cost of your mortgage loan as a yearly rate and is different from the actual note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires that mortgage companies disclose the APR when they advertise a rate. For example: 30-year fixed at 8% with 1 point results in 8.107% APR. The APR does NOT affect your monthly payments. Your monthly payments are calculated by your note interest rate and the length of your loan. The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and then hiding fees that increase your costs. The APR rate is generally higher than the rate stated on your mortgage note because the APR includes other costs, such as origination fee, loan discount points, and pre-paid interest. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders. Unfortunately, there is no uniform method of calculating APRs and the rules for computing APRs are not clearly defined, so different lenders calculate APRs differently! In general, the following fees are usually included in the calculation of the APR: discount and origination points; pre-paid interest (most companies assume 15 days of interest in their calculations, but some may use any number between 1 and 20), loan processing fee, underwriting fee, document preparation fee, private mortgage insurance costs, appraisal fee, and credit report fee. Sometimes, the loan application fee and credit life insurance costs may also be included in the APR calculation. In general, the following fees are usually NOT included in the calculation of the APR: title or abstract fee, escrow fee, attorney fee, notary fee, closing document preparation fee (charged by the closing agent), home inspection fees, recording fee, transfer taxes. Also, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs! Therefore, a loan with a lower APR is not necessarily a better rate. |
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