Posted on: 30th Mar, 2004 11:44 pm
If you want to know the costs of a mortgage loan, one good way to do so is to look at the Annual Percentage Rate (APR). APR is a broader index of the costs of a mortgage than the mortgage rate of interest. As per the Truth-in-Lending Act, lenders are required to disclose the APR of the mortgage loans offered by them.
- What is APR?
- What fees/costs are included in APR?
- Why is APR not the only factor to compare loans?
- What are the drawbacks of APR?
- Discount points
- Origination points
- Underwriting fees
- Loan processing fees
- Document preparation fees
- Title fees
- Prepaid interest
- Private mortgage insurance
- Attorney fees
- APR is a percentage rate. It does not give the costs of a mortgage in absolute figures. But, the borrowers have to pay some costs upfront. Due to this, APR may sometimes be little confusing to the home buyers.
- At the time of calculation of APR, it is assumed that the you pay off the mortgage loan through normal amortization. But, in actual practice, you may pay off the mortgage early or you may refinance the mortgage too. Calculation of APR does not take these possibilities into consideration.
- At the time of estimating the APR of a loan, it is assumed that the rate of inflation is zero over the entire loan term. In turn, this means that the value of dollar remains unchanged throughout the loan term. But, in reality the rate of inflation does not remain unchanged over the entire loan term.
What is APR?
Annual Percentage Rate is not the rate which is advertised by the lender. Rather it is an effective rate that reflects the costs of a loan. APR is calculated by taking into consideration the rate of interest on the mortgage loan as well as the closing costs. Home buyers can get to know the APR by taking the help of an APR calculator. APR can be effectively used to make a comparison of different lenders as well as the loans offered by them.
What fees/costs are included in APR?
Some of the fees and costs that are included in APR are listed below:
Why is APR not the only factor to compare loans?
APR should not be treated as the sole factor to make mortgage comparisons. To compare mortgage offers, various factors that should be taken into consideration are – mortgage rate of interest, closing costs and lender fees. Here, it is to be noted that the lender fees may sometimes be used to lower down the mortgage rate of interest.
Here's an example, which helps you understand why you should not rely solely on APR to compare mortgage loans. Let's consider two 30-year fixed rate mortgage loans - A and B - with loan amount $180,000 each.
Details of loan ALoan amount=$180,000Interest rate=6.25%APR=6.50%Lender fees=$4500
The loan amount financed=$180,000 - $4500=$175,500
The monthly payment amount by using the FRM calculator =$1108.29

Details of loan B
Loan amount=$180,000Interest rate=6.50%APR=6.70%Lender fees=$1000
The loan amount financed=$180,000 - $1000=$179,000
The monthly payment amount=$1137.72
So, the difference between monthly payments in loan A and loan B is=$1137.72 - $1108.29=$29.43
Here, it is to be noted that the APR of loan A is lower than the APR of loan B, but to obtain loan A, you have to pay additional $4500 - $1000=$3500 as lender fees. In other words, by opting for loan B, you can save $3500 in lender fees.If you go for loan A, you have to however pay $29.43 less as monthly payment. To recover $3500, time required will be 3500/29.43= 119 months or 9.9 years. If you have plan to sell the house within next 9.9 years, then you will not able to recover the costs and loan B will be suitable for you. In other words, in such case even a loan with higher APR will be suitable for you. Again, if you don't have any plan to sell the house within 9.9 years, then loan A will be suitable for you.
Here's an example, which helps you understand why you should not rely solely on APR to compare mortgage loans. Let's consider two 30-year fixed rate mortgage loans - A and B - with loan amount $180,000 each.
Details of loan ALoan amount=$180,000Interest rate=6.25%APR=6.50%Lender fees=$4500
The loan amount financed=$180,000 - $4500=$175,500
The monthly payment amount by using the FRM calculator =$1108.29

Details of loan B
Loan amount=$180,000Interest rate=6.50%APR=6.70%Lender fees=$1000
The loan amount financed=$180,000 - $1000=$179,000
The monthly payment amount=$1137.72
So, the difference between monthly payments in loan A and loan B is=$1137.72 - $1108.29=$29.43
Here, it is to be noted that the APR of loan A is lower than the APR of loan B, but to obtain loan A, you have to pay additional $4500 - $1000=$3500 as lender fees. In other words, by opting for loan B, you can save $3500 in lender fees.If you go for loan A, you have to however pay $29.43 less as monthly payment. To recover $3500, time required will be 3500/29.43= 119 months or 9.9 years. If you have plan to sell the house within next 9.9 years, then you will not able to recover the costs and loan B will be suitable for you. In other words, in such case even a loan with higher APR will be suitable for you. Again, if you don't have any plan to sell the house within 9.9 years, then loan A will be suitable for you.
What are the drawbacks of APR?
APR is a good indicator of the costs of a mortgage loan but it has some downsides too. Here are few drawbacks of APR-
Despite these drawbacks, APR gives a fair idea about the costs of a mortgage loan and borrower should have a look at this before finalizing a mortgage deal.
Despite these drawbacks, APR gives a fair idea about the costs of a mortgage loan and borrower should have a look at this before finalizing a mortgage deal.
Related Articles
Closing Fee Detail 130 - 30 Year Conforming Fixed 6.875 @ 1.375 Points
State: PA County: Lackawanna
Loan Amount: $66,300.00 LTV: 86.87%
Monthly Payment: $464.27
--------------------------------------------------------------------------------
800
ITEMS PAYABLE IN CONNECTION WITH LOAN
801 - Loan Origination Fee $0.00
802 - Loan Discount Fee $911.63
803 - Appraisal Fee $350.00
804 - Credit Report Fee $30.00
805 - Final Insp/Add'l Appraisal Fee $0.00
806 - QLSS Appraisal Mgmt $75.00
807 - Flood Life of Loan Coverage $5.00
808 - Flood Cert Fee $10.50
809 - Underwriting Fee $295.00
810 - Processing Fee $575.00
811 - Buydown Fee $0.00
900
ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE
901 - Interest $0.00
902 - Mortgage Insurance Premium $0.00
903 - Hazard Insurance Premium $0.00
904 - Flood Insurance $0.00
1000
RESERVES DEPOSITED WITH LENDER
1100
TITLE CHARGES
1101 - Settlement or Closing Fee $325.00
1102 - Abstract or Title Search $0.00
1103 - Title Examination $0.00
1104 - Title Insurance Binder $0.00
1105 - Document Preparation Fee $0.00
1105b - Deed Preparation Fee $0.00
1106 - Notary Fees $0.00
1107 - Attorney's Fees $0.00
1108 - Title Insurance Premium $720.75
1109 - Lender's Coverage $0.00
1110 - Owner's Coverage $0.00
1111 - Insured Closing Letter Premium $35.00
1112 - EPA/Survey/Title $225.00
1113 - Tax Certification $100.00
1200
GOVERNMENT RECORDING & TRANSFER CHARGES
1201a - Recording Deed Fee 0.00
1201b - Recording Mortgage Fee 146.00
1201c - Recording Releases Fee 0.00
1202a - Cty/Cnty Deed tax/stamp 381.60
1202b - Cty/Cnty Mtg. tax/stamp 0.00
1203a - State Deed tax/stamp 381.60
1203b - State Mortgage tax/stamp 0.00
1204 - Assignment Fee 0.00
1205 - (Misc) Rec./Trans. Cost 0.00
1300
ADDITIONAL SETTLEMENT CHARGES
1301 - Survey 250.00
1302 - Pest Inspection 0.00
1303 - Subordination Agreement 0.00
1304 - Tax Related Service Fee 0.00
1305 - Document Preparation 0.00
1306 - Rock Insurance 0.00
1307 - Express Mail/Courier Fee 0.00
1308 - Debts to be paid(per addendum) 0.00
1309 - Tax Proration 0.00
1310 - Escrow Holdback 0.00
1311 - VOD/VOM/VOR 0.00
--------------------------------------------------------------------------------
Total Client Paid Fees $4,817.08
Estimated Closing Fee Details
This is an estimate of closing fees and also may not cover all items you could be required to pay at closing. Such items may include, but are not limited to, prepaid interest, hazard insurance and escrows. This is not meant to replace the Good Faith Estimate of Closing Costs which will be mailed to you within 3 business days of applying for a loan.
Mortgage Banker: Stephen Peters
Email: stevepeters@quickenloans.com
Phone: (800) 226-6308 EXT: 57495
State: PA County: Lackawanna
Loan Amount: $66,300.00 LTV: 86.87%
Monthly Payment: $464.27
--------------------------------------------------------------------------------
800
ITEMS PAYABLE IN CONNECTION WITH LOAN
801 - Loan Origination Fee $0.00
802 - Loan Discount Fee $911.63
803 - Appraisal Fee $350.00
804 - Credit Report Fee $30.00
805 - Final Insp/Add'l Appraisal Fee $0.00
806 - QLSS Appraisal Mgmt $75.00
807 - Flood Life of Loan Coverage $5.00
808 - Flood Cert Fee $10.50
809 - Underwriting Fee $295.00
810 - Processing Fee $575.00
811 - Buydown Fee $0.00
900
ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE
901 - Interest $0.00
902 - Mortgage Insurance Premium $0.00
903 - Hazard Insurance Premium $0.00
904 - Flood Insurance $0.00
1000
RESERVES DEPOSITED WITH LENDER
1100
TITLE CHARGES
1101 - Settlement or Closing Fee $325.00
1102 - Abstract or Title Search $0.00
1103 - Title Examination $0.00
1104 - Title Insurance Binder $0.00
1105 - Document Preparation Fee $0.00
1105b - Deed Preparation Fee $0.00
1106 - Notary Fees $0.00
1107 - Attorney's Fees $0.00
1108 - Title Insurance Premium $720.75
1109 - Lender's Coverage $0.00
1110 - Owner's Coverage $0.00
1111 - Insured Closing Letter Premium $35.00
1112 - EPA/Survey/Title $225.00
1113 - Tax Certification $100.00
1200
GOVERNMENT RECORDING & TRANSFER CHARGES
1201a - Recording Deed Fee 0.00
1201b - Recording Mortgage Fee 146.00
1201c - Recording Releases Fee 0.00
1202a - Cty/Cnty Deed tax/stamp 381.60
1202b - Cty/Cnty Mtg. tax/stamp 0.00
1203a - State Deed tax/stamp 381.60
1203b - State Mortgage tax/stamp 0.00
1204 - Assignment Fee 0.00
1205 - (Misc) Rec./Trans. Cost 0.00
1300
ADDITIONAL SETTLEMENT CHARGES
1301 - Survey 250.00
1302 - Pest Inspection 0.00
1303 - Subordination Agreement 0.00
1304 - Tax Related Service Fee 0.00
1305 - Document Preparation 0.00
1306 - Rock Insurance 0.00
1307 - Express Mail/Courier Fee 0.00
1308 - Debts to be paid(per addendum) 0.00
1309 - Tax Proration 0.00
1310 - Escrow Holdback 0.00
1311 - VOD/VOM/VOR 0.00
--------------------------------------------------------------------------------
Total Client Paid Fees $4,817.08
Estimated Closing Fee Details
This is an estimate of closing fees and also may not cover all items you could be required to pay at closing. Such items may include, but are not limited to, prepaid interest, hazard insurance and escrows. This is not meant to replace the Good Faith Estimate of Closing Costs which will be mailed to you within 3 business days of applying for a loan.
Mortgage Banker: Stephen Peters
Email: stevepeters@quickenloans.com
Phone: (800) 226-6308 EXT: 57495
Thanks for sharing the information. I also feel there are lots of junk fees included in the list you have provided.
I'm new here, just wanted to say hello and introduce myself.
hello surnarymborma,
good to know that you want to introduce yourself but you haven't said anyuthing about yourself.
good to know that you want to introduce yourself but you haven't said anyuthing about yourself.
I would like to know that when get to Good Faith Estimate there are in Hud 1 that there are several charges sections such as 800s, 900s, 1000s, 1100s. and 1200s. which section is included in Lender fee and Which is as borrower has to pay as unavoiable fees.
Thank you very much.
Thank you very much.
In your APR example loan x vs y. The APR rates shown for the two loans do not jive with the APR calculated by your calculated APR calculator.
Example in X w/$5000 fees a 6% simple rate shows an APR of 6.25%, an increase of 0.25%. The calculator shows 6.232%. For loan Y w/ $1500 fees a 6.25% simple rate shows an APR of 6.45%. The calculator shows 6.32%. Why is this so?
Example in X w/$5000 fees a 6% simple rate shows an APR of 6.25%, an increase of 0.25%. The calculator shows 6.232%. For loan Y w/ $1500 fees a 6.25% simple rate shows an APR of 6.45%. The calculator shows 6.32%. Why is this so?
APR calculators are a good tool to help lenders. However, a problem with calculators is that they spit out numbers w/o and understanding of the input variables used in the calculation. I think most people can understand higher loan fees will increase the APR percentage over the simple interest rate but fail to understand the complexity of the calculations. Actually it is not really that complex. The APR is simply equal to the simple interest rate [SIR] plus the additional interest rate [AIR] resultinf from the loan fees.
The AIR is equal to the loan fees divided by the loan amount divided by the loan term, e.g., annualized.
The AIR is equal to the loan fees divided by the loan amount divided by the loan term, e.g., annualized.
gene, i have never heard of "air" other than what i breathe. where did you come up with this compilation of how apr calculations are done? and are you an actuary?
Hi, Jessica
I am troubled by the APR our lender gave us. We are buying a home for 216K. During the process we discussed about interest rate but not APR. He gave us 5.25% Interest rate but when we received the Truth-In-Lending disclosure, we were surprised to see the 5.924% APR. We ask him about it and he said that APR is usually higher than interest rate. Is this reasonable rate compared to the current market?
Thank you very much for this site.
Troubled borrower
I am troubled by the APR our lender gave us. We are buying a home for 216K. During the process we discussed about interest rate but not APR. He gave us 5.25% Interest rate but when we received the Truth-In-Lending disclosure, we were surprised to see the 5.924% APR. We ask him about it and he said that APR is usually higher than interest rate. Is this reasonable rate compared to the current market?
Thank you very much for this site.
Troubled borrower
The annual percentage rate can be described the interest rate for a whole year rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. This rate is likely to differ from the "note rate" or "headline rate" advertised by the lender as there are other fees added in it. The present rates keep on changing between 5%-6%. So in my opinion, you are getting a reasonable rate.
Does a lender has the control of all the fees listed ? I think NOT. If so we should choose a lender that is going to charge us the least fee at the rate we want. All the other fees that were charged by third parties has nothing to do with the lender. But the lender should state such fact clearly on the estimate so as not to confuse us. The problem is, I am afraid that many lenders have indirect control over these third party fees which they will not reveal to us. Many of them even give us last minute fee surprises which many borrowers have experienced. Unless they are ignorant themselves, they intentionally list all kind of different fees just to confuse us. It is sad that no law exist to prevent them from doing this.
As for the third party fees, fees that are charged by the escrow or title company, do borrowers have a choice or are we at their mercy. For my case, I have no choice as the seller is going to choose those companies. Thanks to my Real Estate agent due to my ignorance.
It's frustrating isn't it?
Waysc
As for the third party fees, fees that are charged by the escrow or title company, do borrowers have a choice or are we at their mercy. For my case, I have no choice as the seller is going to choose those companies. Thanks to my Real Estate agent due to my ignorance.
It's frustrating isn't it?
Waysc
I still don't get it. What am I really paying? Right now my APR is 4.599 on a mort having 13 more years. Rate was 4.5.
We now have a chance to refi to a 10year note, paying $19.00 more a month. Rate advertised is 3.75, APR is 4.116 accoridng to their truth in lending estimate. I see that I still save .483 on the APR and cut 36 mos of payments. Is this ok? Thank you.
We now have a chance to refi to a 10year note, paying $19.00 more a month. Rate advertised is 3.75, APR is 4.116 accoridng to their truth in lending estimate. I see that I still save .483 on the APR and cut 36 mos of payments. Is this ok? Thank you.
hi wanda!
welcome to forums!
the rate offered to you is quite low and if you are planning to stay in the property for a longer period of time, then it'll be a good option to refinance the mortgage.
sussane
welcome to forums!
the rate offered to you is quite low and if you are planning to stay in the property for a longer period of time, then it'll be a good option to refinance the mortgage.
sussane
Don't be confused over APR/APY/BANK NOTE RATE. make it real simple give me the lowest apr and the lowest fees and you will find that to be the best way to go. Don't confuse people with all your jargon. Remember low apr/low fees=lowest out of pocket and payment
DOES IT COST ME TO GET A GFE FROM THE MORTGAGE BROKER/LENDER