Calculating the APR on your mortgage...APR stands for Annual Percentage Rate
I read George Tallabas' blog on Home Mortgages >> What You Are Rarely Told (click here) and felt compelled to go deeper into a portion of his blog that spoke about the APR and your mortgage. Thanks George for giving me the inspiration and the idea to write this blog today.
The APR is one of the most misunderstood numbers people notice on their loan paperwork. There has to be a way that consumers can compare lenders on any loan, but mortgages in particular for this post, and in a way that the public can understand the total cost of credit. The APR is defined as the cost of credit to the borrower in relation to the amount borrowed expressed as a yearly rate. This is required by the federal Truth in Lending Act, Regulation Z.
When you apply for a mortgage the Federal Truth in Lending Disclosure form must be sent. Near the top of the page you will see 4 boxes that contain numbers. Generally, in the first box you will see Annual Percentage Rate (APR). The Annual Percentage Rate will always be higher than your note rate because the APR includes other items associated with obtaining the mortgage loan.
Origination fees, points, mortgage insurance premiums, inspections, prepaid interest and other items may also be required to obtain a mortgage. If so, these things need to be included when calculating the APR. Why is the APR useful? Below is an example:
Bank A offers a 30 year fixed mortgage for 7.00%. Bank B offers a 30 year fixed mortgage for 6.5%. Easy decision, seems like a no brainer, right? Maybe, maybe not. Before lenders and mortgage brokers were required to state the APR it was hard to know if you were really getting the best deal. Bank B has the lower rate but did not mention a few other fees. There was a 2-point origination fee and a 1-point discount fee. Bank A had no origination and no discount fee.
On a $200,000 loan, Bank B charged an additional $5,000 when compared to Bank A's fixed rate loan. You could save an additional sixty-six bucks per month with Bank B's mortgage but you had to pay $5,000 for the privilege. The $5,000 must be included as a cost to obtain the mortgage and is reflected in the APR.
I could give many more examples but what I want to inform you about is that the higher the loan amount, the less impact additional fees or points will have on the APR. Why, you ask? If you obtain a mortgage with $3,000 of closing costs and you borrow $20,000, then the $3,000 will be 15% of the loan amount. This dramatically increases the cost of credit.
The fees used to calculate the APR:
1:Origination fees
2:Points
3:Buy-down funds from the buyer
4:Prepaid mortgage interest
5:Mortgage insurance premiums
6:Other lender fees (application, underwriting, tax service, etc) 7:Title company's closing fee
The fees not included in the calculation of the APR:
1:Title insurance 2:Appraisal 3:Credit report 4:Hazard Insurance 5:Property Taxes 6:Survey
The main reason the above fees are not being included in the calculation of the APR is because they are not coming from the lender. Many states now have additional laws that require the lenders and brokers to state the APR in their advertisements beyond the requirements of the Federal Regulation. When you're comparing APR's, ask your lender which fees are included in the calculation of their APR. APR's are a way of helping you determine the best loan based upon the total cost.
The bottom line is the APR is your best way to compare mortgages.
Respectfully,
Joe Bartolotta
Upfront Mortgage Broker
Fidelity Mortgage Services
www.joebartolotta.com
Direct 407.340.0220
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