Financing Information you need to help you buy a home in Reno, Sparks or Fernley. Brought to you by Sandra Mathewson, A RE/MAX premier agent!
The annual percentage rate (APR) is an interest rate that is different from the mortgage 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 the rate.
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 the lenders. It prevents lenders from advertising low rates and hiding fees.
If life were easy, all you would have to do is compare APR's from the lenders/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong!
Unfortunately different lenders calculate APR's 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 cots on the same type of program (e.g. 30 year fixed) at the same interest rate. Then delete all the fees that are independent of the loan such as homeowners insurance, titile fees, escrow fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with the higher loan fees.
The reason why APR's are confusing is because the rules to compute APR are not clearly defined.
What fees are included in the APR?
The following fees are generall inacluded in the APR:
- Point-both discount and origination points
- 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.
- Loan processing fee
- Underwriting fee
- Document preparation fee
- Private mortgage insurance
The following fees are SOMETIMES included in the APR:
- Loan application fee
- Credit life insurance (insurance that pays off the mortgage in the event of the borrowers death)
The following fees are normally NOT included in the APR:
- Title or abstract fee
- Escrow fee
- Attorney fee
- Notary fee
- Document preparation (charged by the closing agent)
- Home inspection fee
- Recording fee
- Transfer taxes
- Credit report
- Appraisal fee
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.
Do not attemp to compare a 30 year loan with a 15 year loan using their respective APR's. 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 APR's. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APR's.
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 tat are independent of the loan.