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The annual percentage rate (APR) is an interest rate that
is different from the note rate. It is commonly used to
compare loan programs from different lenders. The Federal
Truth in Lending law requires mortgage companies to disclose
the APR when they advertise a rate. Typically the APR is found
next to the rate.
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Example:
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30-year fixed
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6%
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1 point
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6.107% APR
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The APR does NOT affect your monthly payments. Your
monthly payments are a function of the interest rate and the
length of the 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 hiding fees.
If life were easy, all you would have to do is compare APRs
from the lenders or
brokers you are working with, then pick the
easiest one and you would have the right loan. Right? Wrong!
Unfortunately, different lenders calculate APRs
differently! So a loan with a lower APR is not necessarily a
better rate. The best way to compare loans in the author's
opinion 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. Then delete 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 reason why APRs are confusing is because the rules
to compute APR are not clearly defined.
What fees are included in the APR?
The following fees ARE generally included in the APR:
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Points - both discount points and origination points
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Pre-paid interest. The interest paid from the date the
loan closes to the end of the month. Most mortgage
companies assume 15 days of interest in their
calculations. However, companies may use any number
between 1 and 30!
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Loan-processing fee
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Underwriting fee
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Document-preparation fee
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Private
mortgage insurance
The following fees are SOMETIMES included in the APR:
The following fees are normally
NOT included in the APR:
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Home-inspection fees
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Recording fee
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Transfer taxes
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Credit report
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Appraisal fee
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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 even
more complex because future rates are unknown. The result is
even more confusion about how lenders calculate APRs.
Do not attempt to 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 fees are amortized over a shorter period of time. Finally, 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!
Conclusion :
Use the APR as a starting point to compare loans. The APR is a
result of a complex calculation and not clearly defined. There
is no substitute to getting a good-faith estimate from each
lender to compare costs. Remember to exclude those costs that
are independent of the loan.
If you have questions just ask! You may contact us at
Virginia Mortgage Bankers, LLC for your mortgage APR questions by email, phone or by appointment at
our office.
Start now by filling out our secure online
application for a mortgage loan! Call us at
804.282.8808, Monday through Friday from 9 a.m. to 5 p.m. Eastern time
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