<< Frequently Asked Questions (FAQ)

What is an APR?

The annual percentage rate (APR) is an interest rate that is different from the note rate and serves as a starting point to compare loans from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate.

The APR is a result of a complex calculation and can be a confusing number. There is no substitute to getting a good-faith estimate from each lender to compare costs and to exclude those costs that are independent of the loan.

The APR does not affect your monthly payments because it is a function of the interest rate and the length of the loan. It is designed to measure the true cost of a loan and creates a level playing field for lenders preventing them from advertising a low rate and hiding fees.

A loan with a lower APR is not necessarily a better rate. The best way to compare loans is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 15 year fixed) at the same interest rate. Then strip all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.

The following fees are typically included in the APR:

•         Underwriting fee

•         Loan processing fee

•         Document preparation fee

•         Private mortgage insurance

•         Discount points and origination points

•         Pre-paid interest - Interest paid from the closing date to the end of the month. Most mortgage companies typically assume 15 days of interest in their calculations, but may use any number between one and 30.

The following fees are sometimes included in the APR:

•         Loan-application fee

•         Credit life insurance that pays off the mortgage if a borrower dies

The following fees are normally not included in the APR:

•         Title or abstract fee

•         Notary fee

•         Escrow fee

•         Attorney fee

•         Appraisal fee

•         Credit report

•         Recording fee

•         Transfer taxes

•         Home-inspection fees

•         Document preparation (charged by the closing agent

A few other quick points:

•         An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock.

•         Calculating APRs on adjustable and balloon loans is more complex because future rates are unknown.

•         Do not compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fee s are amortized over a shorter period of time.

•         Many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is possible that the same lender with the same fees using two different software programs may arrive at two different APRs.