What is an APR?
The annual percentage rate (APR) is an interest rate reflecting the cost of
a mortgage as a yearly rate. This rate is likely to be higher than the stated
note rate or advertised rate on the mortgage, because it takes into account
points and other credit costs. The APR allows homebuyers to compare different
types of mortgages based on the annual cost for each loan. 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 hiding fees.
The APR does not affect your monthly payments. Your monthly payments are strictly
a function of the interest rate and the length of the loan.
Because different lenders calculate APRs differently, 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. 30-year fixed) at the same interest rate. You can then delete
the 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 generally included in the APR:
- Points - both discount points and origination points
- Pre-paid interest. The interest paid from the date the loan closes to the
end of the month.
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage-insurance
The following fees are sometimes included in the APR:
- Loan-application fee
- Credit life insurance (insurance that pays off the mortgage in the event
of a borrowers death)
The following fees are normally not included in the APR:
- Title or abstract fee
- Escrow fee
- Attorney fee
- Notary fee
- Document preparation (charged by the closing agent)
- Home-inspection fees
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
