Understanding the APR on a Home Loan
The home loan Annual Percentage Rate ( APR ) is requirement for all mortgage lenders to disclose regarding the interest rate charged on a mortgage loan. The APR is intended to give the consumer a tool to measure the true cost of a loan as expressed as an annual interest rate that includes the fees and costs associated with getting the loan. In a nutshell, it is a measure of the cost of credit that includes loan fees paid to the lender upfront combined with the interest rate on the loan.
The Federal Truth In Lending Law governs the calculation and time of disclosure regarding the APR on a home loan. The APR was designed to level the playing field when consumers are comparing home loan products and other consumer loans. The APR is an annual interest rate developed to calculate an interest rate and discloses the amount of interest that will be paid on a given loan over the life of the loan. The most significant aspect of the APR is that it calculates the interest rate on the loan based on the amount of money made available, loan costs, and the rate on the promissory note. The fees and costs to obtain the loan will often reduce the amount of funds available and the note rate and APR will be different percentages. The significant difference in the interest rate the payment is based on and the APR is that the APR subtracts certain costs associated with the home loan to determine how much of the funds are actually used.
When all is said and done the APR is a very important starting point but it does allow flexibility with a lender to avoid subtracting certain fees from the loan amount to calculate APR. Therefore, some classes of fees are deliberately not included in the calculation of APR. Origination fees, inspection fees, flood certification fees and mortgage broker fees will always be included as fees to calculate the home loan APR. Application fees maybe included while appraisal and credit fees are excluded. Document preparation fees are not included as are title insurance costs. However if there is a credit life insurance fee this may or may not be included in the APR calculations. Clearly, these examples show that there can be a problem with directly comparing home loan APR’s.
Annual Percentage Rate (APR) is still an indispensable way to compare the costs of mortgage loans. A home loan borrower needs to look at each and every charge and expense related to your prospective loan along with the mortgage rate in order to judge whether or not you’re getting a good deal. More importantly, to use the APR comparison properly you must look at competing home loan quotes, mortgage rates and cost for the same type of home loan. The essential element in the comparison process is that when APR’s vary from different mortgage lenders or banks on identical loan programs, one of the lenders is charging higher fees to reduce the funds you have available and thus driving the APR higher.
If an APR on a one home loan is measurably higher than the mortgage note rate, it is likely that the mortgage lender is charging more lender fees. In addition, a home loan borrower needs to look at how long they will be using the mortgage loan to make the best decision on which home loan suits their needs. For example, one-time charges up front may drive up your actual cost on a home loan, even though an home loan APR calculation might assume those charges are spread out over a longer lifetime (and therefore the APR would look lower). If a home owner intends to keep the property for a specific time or just intends to refinance the mortgage after a specific time the APR may not be the final tool to use in evaluating the best mortgage loan and the best mortgage rate.
To help with the evaluation, online mortgage calculators may be a useful reference to compare mortgage costs, mortgage rates and terms quickly and easily. Although it’s not perfect, the mortgage APR gives you a nice standard for comparing the percentage costs on different mortgage loans with different mortgage rates and the same term. The mortgage APR can be used to compare home loan offers for purchases as well as refinance transactions.