Even with the new Loan Estimate (LE) which replaced the Good Faith Estimate (GFE) one of the most frequently asked questions I am asked during the time of originating a loan, continues to be The APR Is Higher Than The Interest Rate ..... Why? The Annual Percentage Rate (APR) is one of the most misunderstood and confusing components of the loan process.
The APR is not only confusing and misunderstood by Borrowers, it is also confusing and misunderstood by many in the Real Estate Industry, including Loan Originators. If you doubt what I am saying, just ask the next Loan Originator you speak to, to explain what the APR is, and what fees go into the APR calculation? 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. So if those who make a living originating loans have a difficult time explaining how the APR is arrived at, how can anyone expect a Borrower to understand it?
I want to first make one thing very clear, the APR is NOT an interest rate. The interest rate is the rate which makes up the interest portion of a mortgage payment. As oppose to the APR which is simply a calculation that is expressed as a percentage (%) which is suppose to reflects the Lender Fees in a loan. The purpose of the APR is to give a Borrower a quick and easy way to determine which Lender has the higher fees. So if two Lenders have the same interest rate for the same loan product, the Lender with the higher APR has the higher Lender Fees.
That in a nutshell is all the APR is meant to be. If those reading this blog remember nothing else, please remember this:
- The APR is NOT an Interest Rate
- The APR IS a percentage which reflects costs
- The intent of the APR is for Shopping Purposes
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 principle and interest figure remains the same, the result in 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
- Appraisal Review Fee
- Lender Inspection Fee
- Wire Transfer Fee
- Flood Certification Fee
- Broker Fee
All these are not charged by all Lender, generally a combination of these fees are what is charged and they vary from Lender to Lender. But these are among the fees most commonly charged which make up the APR. The important thing to remember is that any fee which is Lender related is part of the APR.
Fees that are NOT part of the APR are:
- Title Fee
- Attorney Fee
- Recording Fee
- Credit Report Fee
- Appraisal Fee
- Notary Fee
- Home Inspection Fee
- Taxes
- Homeowners Insurance
- Re-Inspection Fees
I hope the above explanation has made it easier to understand Why the Annual Percentage Rate (APR) is higher than the Interest Rate?
Note:
One more thing, a Lender is required to state the APR every time the Lender quotes an interest 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
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