The APR fee is one of the most misunderstood fees in the mortgage industry. As consumer loans, and mortgages in particular, turned more complicated it became necessary to help regulate the way lenders advertise and notify the potential borrower of their interest rates. The attempt was to help people compare similar loans from different lenders and to explain the ultimate cost of credit. This is required by the federal Truth in Lending Act, Regulation Z.
When you apply for a mortgage the Federal Truth in Lending Disclosure form will be sent. At the top of the page you will see many figures. Two of those numbers are the Note Rate (the actual rate used to calculate your monthly payments) and the Annual Percentage Rate (APR). The Annual Percentage Rate will most always be slightly higher than the note rate because the APR includes other items associated with obtaining a mortgage.
The Fees used to calculate the APR?
There are the most common fees used when calculating APR:
1. Origination fees
3: Buydown funds from the buyer
4: Prepaid mortgage interest
5: Mortgage insurance premiums
6: Other lender fees (application, underwriting, tax service, etc.)
Other fees such as title insurance, appraisal and credit are not included in calculating the APR. The idea here is these other fees are not coming from the lender, and they would be charged anyway, although in the real world, this also may not be true. Like I said, we’re talking Federal Government here. Many states now have additional laws that require the lender or broker to state the APR in their advertisements beyond the requirements of the Federal Regulation. When you compare APRs, ask the lender which additional fees are included when calculating their APR.
This fee is used by the banks loan officers as sales ploy to make their deal look better than a broker deal. Yes in some cases they are correct but most of the time I find that it is not the case. What the bank does not tell you is to look at the bottom line figures, what is your monthly payment – common sense. Yes APR is important as bank or broker but there are safe gards in place to limit the amount of fees that can be charged. Section 32 limits the total fees both origination and third party fees at a max of 5.99%. So on a loan of $100,000 the max fees can only be $5,990. Sounds like a lot of money for a loan but remember all fees so subtract your title, endorsements and escrow fees and nearly 50% of the cost are gone. Now factor in the other third party fees and you can see that a broker is not making nearly as much as a bank L/O would have you think. The point here is not to fixate on the APR but rather the actual cost per month.