Annual Percentage Rate, what is APR?

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 Loan Officers admit it is confusing.  The APR is designed to measure the "true cost of a loan" and is supposed to create a level playing field.  The intention of the law to mandate disclosure of APR is to help prevent lenders from advertising a low rate and hiding fees.  If you do have the rate and fees to compare your lenders, you don't need the calculated APR % they give you.

If life were easy, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the lowest one and you would have the right loan.  Lenders have different names for their fees, which can make comparing even more confusing.  What you have as a result are different lenders who calculate APRs differently.  A loan with a lower APR is not necessarily a better rate. 

The best way to compare loans is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (30-year fixed, 5 year ARM, Option ARM) at the same interest rate.  Then delete all fees that are independent of the loan such as homeowners insurance, attorney fees, taxes, etc.  Now add up all the loan fees.  The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.

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.  Most important, use a Loan Officer you trust. 

Ask for references.  There is no better way determine how your transaction will be handled, then to see how a Loan Officer has handled their past clients.

 

The rules to compute APR are not clearly defined. What fees are included in the APR?
The following fees ARE generally included in the APR:

  • Points- both discount points and origination points. 1 point equals 1% of the loan amount.*
  • Pre-paid interest- The interest paid from the date the loan closes to the end of the month. If you close on August 10th, you will pay 21 days of pre-paid interest.
  • Loan-processing fee- generally $495 to $695*
  • Underwriting fee- $395 to $695*
  • Document-preparation fee- $195 to $295*
  • Private mortgage-insurance
  • *These are amounts that are typically charged. No cost loans are also an option.  If your costs are zero or very low costs, you will be paying a higher rate instead.

The following fees are SOMETIMES included in the APR:

  • Loan-application fee (Choice Finance® does not charge this fee)
  • Credit life insurance (insurance that pays off the mortgage in the event of a 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 fees
  • Recording fee
  • Transfer taxes
  • Credit report
  • Appraisal fee

Calculating APRs on adjustable rate mortgages is even more complex because future rates are unknown.  The result is even more confusion about how lenders calculate APRs.  You will see with some lenders that their APR on an ARM is actually lower than the note rate!

A lender who offers you a 15-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock.  APR does not tell you how long your rate is locked for.

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.  It is not wise to compare a 30-year loan with a 15-year loan using their respective APRs.

Many lenders do not even know what they include in their APR because they use an automated software program to compute their APR.  It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs.

Again, if you have the rate and fees to compare your lenders, it is recommended you don't focus on the APR figure... don't even look at it if you can help it, it will only help to confuse you.