Home Loan A.P.R.
What is it Understanding your A.P.R.
A.P.R (Annual Percentage Rate) is a confusing number at best. The A.P.R. number is supposed to reveal the true cost of a home loan. When you obtain a mortgage loan (fixed or adjustable), you'll have your interest rate (which your monthly payments are based on) and your A.P.R. The A.P.R is designed to show you what the cost of your loan is, when you include all the fees. The problem with the A.P.R is some lenders don't include all the fees so that you won't truly know the A.P.R. There is no clear cut guideline as to what should or should not be included. Below is a loose guideline that some lenders follow:
The following fees ARE generally included in the A.P.R:
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)
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
Your A.P.R does not advise you on how long your rate is locked for. A mortgage company who offers you a 10-day rate lock may have a lower A.P.R than a lender who offers you a 60-day rate lock! Do not attempt to compare a 30-year loan with a 15-year loan using their respective A.P.Rs. A 15-year loan may have a lower interest rate, but could have a higher A.P.R, since the loan fees are amortized over a shorter period of time.
Calculating A.P.Rs on most adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate A.P.Rs. Finally, many lenders do not even know what they include in their A.P.R because they use software programs to compute their A.P.Rs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different A.P.R numbers!
Kevin O'Connor
Mortgage Consultant
www.koloans.com
800.550.5538
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