What is an APR?

The annual percentage rate (APR) is the cost of a loan in one year with one-time costs amortized over the life of the loan. 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. The APR does not impact your monthly payments.

The rules to compute APR are not clearly defined. 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. The days of interest computed can be any number of days from 1-30, so ask how many days are covered
  • Loan-processing fee
  • Underwriting fee
  • Document-preparation fee
  • Private mortgage-insurance

The following fees can be included in the APR but are not always included:

  • Loan-application fee
  • Credit life insurance (insurance that pays off the mortgage in the event of a borrower’s death)

The following fees are usually 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

Unfortunately, different lenders calculate APRs differently, so a loan with a lower APR is not necessarily less expensive over the life of the loan. The best way to compare loans is to compare good-faith estimates of costs on the same type of loan (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, and escrow fees, attorney fees, etc. and add up the loan fees. The lender that has lower total loan fees has a cheaper loan than the lender with higher loan fees.

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