APR is short for the term Annual Percentage Rate. The APR is the total yearly cost of a mortgage and is expressed as a percentage of the loan amount. The APR takes into consideration the total costs of home ownership when obtaining a mortgage. The total costs include certain fees such as interest, lender charges, mortgage insurance and points.
When shopping for a mortgage loan, it is important to compare the APR to the interest rate quoted. The APR is slightly higher than the interest rate. Settlement fees increase the APR. The settlement fees to compare when shopping for the best APR are origination fees, discount points, mortgage broker fees, tax/flood service fee, assumption fees, mortgage insurance premiums, commitment fees and application fees. The higher the loan fees, the higher the APR. The lower the loan fees, the lower the APR.
Financial institutions are required to provide you with certain disclosures when you apply for a mortgage loan. This law prevents financial institutions from hiding fees and costs from borrowers. Two disclosures that play an important role when comparing APR are the good faith estimate, or GFE and the truth-in-lending disclosure.
The GFE contains an estimate of the fees included in the APR. The truth-in-lending disclosure provides you with the interest rate quoted in addition to the APR. Upon receiving the required disclosures, you can determine the true cost of obtaining the mortgage loan.
Shopping around for the lowest fees is essential. A way to do this is to compare the fees by reviewing the lender’s GFE. The largest fee to compare is the origination fee, also known as the mortgage brokerage fee. Also compare the application fees for processing and origination of the mortgage.
Misconceptions: The APR does not include third-party fees such as appraisal costs, inspection fees, settlement fees, title search and examination fees, title insurance costs, nor recording fees and taxes. See: Compare Home Loan Rates.
These third-party fees are paid to title companies, appraisers, attorneys, insurance companies and inspectors. An appraiser performs the property appraisal and is paid on that date, not at the loan closing. A title company performs the title search, examination, title insurance and closing; an attorney may perform these duties as well. Recording fees pay for the county clerk to record the deed and the mortgage. A building Inspector performs termite inspections, water tests and structural inspections of the home. Read: Interest Rates vs APR for Buying a Home.
Things to Consider
When calculating the APR, loan fees are added to the original mortgage amount. The APR is then calculated assuming that the mortgage loan is kept for a standard 30-year term.