What is APR?

APR can be very confusing to the typical consumer. APR is Annual Percentage Rate. APR is calculated by taking the Note Rate and including other fees associated with the loan. The APR is designed to show the "true cost of the loan". Unfortunately, even though this calculation is required by regulators, not every lender calculates it in the same way. Also, most lenders rely on software to do the calculation for them. And every software program has a different set of parameters. This does not cause a large discrepancy, but enough that it could be a problem.

The following fees ARE generally included in the APR:

Points - both discount points 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 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

The best way to compare lenders by their APR is to get a Good Faith Estimate from everyone you are considering using for your mortgage needs. Compare the fees for each lender removing from the equation any fees you know will not be used in calculating APR. Also, remove any amounts for insurance and taxes as these will also not be used to calculate APR. You should go with the lender or broker that gives you the lowest possible fees with the best rate.

If you have any questions, please don't hesitate to comment. We would be glad to help!

APR Calculator