What Loan Fees Are Calculated Into The APR?

At the end of last month I posted a blog titled "What Can Trigger A New Closing Disclosure And Waiting Period" One of the Member who commented on the blog was Fred Cope  who suggested I "consider doing a post detailing items that impact APR" since an increase in the APR of .125% is one of the reasons for having to send the Borrower a new Closing Disclosure and starting a new waiting period.  Fred's request was an excellent one because even most people in the Real Estate and Lending Industries do not know What Loan Fees Are Calculated Into The APR, making the APR one of the most misunderstood and confusing elements in the loan process. 

Even most Loan Originators do not know What Loan Fee Are Calculated Into The APR.  If you doubt me, just ask the next Loan Originator you speak to, to explain what the APR is, and what fees go into calculating the APR?  The odds are most Loan Originators are not going to be able to provide a good answer, or will most likely give a very vague one at best.  So if those who make a living originating loans have a difficult time explaining how the APR is arrived at, how can anyone expect others to understand it?

Let's first make one thing very clear, the APR is NOT an interest rate, it is a percentage.  The interest rate is the rate which makes up the interest portion of a mortgage loan payment.  As oppose to the APR which is simply a calculation expressed as a percentage (%) which is suppose to reflects the Lender Fees and other fees the Borrower is not allowed to shop for.  The main purpose of the (APR) is to give a Borrower a quick and easy way to determine which Lender has the higher fees, in other words for shopping purposes.  So if two Lenders have the same interest rate for the same loan product, the Lender with the higher APR has the higher Fees.

That in a nutshell is all the APR was meant to be.  However, the Consumer Financial Protection Bureau (CFPB) has now found a new use for it.  If the APR increases buy more than .125% after the most recent Closing Disclosure has been given to the Borrower(s), than the Lender or the party responsible for providing the Borrower with the Closing Disclosure, must issue a new Closing Disclosure, and a new 3 day waiting period after the acknowledgment of receipt of the Closing Disclosure by the Borrower starts all over again. 

It is interesting how the APR percentage is arrived at.  The government takes the base loan amount and subtracts the fees which make up the APR from it.  So if the base loan amount is reduced, but the monthly payment remains the same, the result is a higher percentage which reflects the Lender Fees.

The most common Fees that go into the APR are:

• Points
• Processing Fee
• Underwriting Fee
• Closing Fee
• Application Fee
• Broker Fee
• FHA Upfront Fee
• FHA Monthly Interest Premium (MIP)
• VA Funding Fee
• USDA Funding Fee
• Private Mortgage Insurance (PMI) on all loans
• Per Diem Interest
• Lender's Attorney Fee
• Settlement Agent Fee
• Life of Loan Flood Certificate
• Title Search
  

 All these fee are not charged by all Lender and are not part of ever loan, but a combination of these fees makes up the APR and  varies from Lender to Lender.  However, these are the most common fees included in APR calculations.  The important thing to remember is any fee which is Lender related or most fees for services the Borrower cannot shop for is part of the APR.

For example the fees below are among the fee which are not considered Lender fees, and are services the Borrower can shop for, therefore, NOT a part of the APR calculation:

• Attorney Personal Representation Fee
• Notary Fee
• Home Inspection Fee
• Taxes
• Homeowners Insurance
• Title Insurance Fees

There are some fees which the Borrower cannot shop for, but are not considered fees the Lender, because the Lender does not have have control over them, so they are not included in the APR calculation:

• Recording Fee
• Credit Report Fee
• Appraisal Fee
• Re-Inspection Fees

I hope the above explanation has made it easier to understand What Loan Fees Are Calculated Into The APR.  By knowing what goes into the APR, maybe changes which will increase the APR after the Borrower(s) receive the Closing Disclosure can be avoided, and avoid the need to issue a new Closing Disclosure will have to be sent, and having to begin a new waiting period all over again.

Note:

One more thing, a Lender is required to state the APR every time the Lender quotes an interest rate verbally or in writing. 

 

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com