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APR (Annual Percentage Rate) to compare mortgage lenders

If you're willing to know how much your mortgage costs, the APR or Annual Percentage Rate is what you should watch out for. Lenders are required to disclose the APR as part of the Truth-in-Lending disclosure (as per the Truth-in-Lending Act).

What is APR?

The APR is not the actual rate or note rate advertised by the lender. It is the effective rate which represents the cost of borrowing a mortgage loan. Lenders calculate APR taking into account the closing costs and the interest rate on a mortgage. As a borrower, you too can calculate the APR using the APR Calculator.

The Annual Percentage Rate is often used to compare mortgage lenders and the programs they offer. However, it is not an effective tool for lender/loan comparison because a mortgage with high APR may often be a better option compared to one with a low APR.

What fees/costs does the APR include?

Some of the fees/closing costs that the APR includes are:
  • Points (discount and origination points)
  • Prepaid interest (from closing date to the end of the month)
  • Loan processing fee
  • Underwriting fee
  • Document preparation fee
  • Private mortgage insurance

Why is APR not the only factor to compare loans?

The Annual Percentage Rate shouldn't be considered as the only factor to compare mortgage lenders or loans. One should take into account other factors like the interest rate, closing costs and lender fees. The APR assumes zero inflation thereby considering that the value of dollar would remain same even after 10-20 years. But this isn't true. Besides, when lenders calculate APR, they assume that the mortgage won't be paid off early even though the average life span of the loan ranges from 5 to 7 years for most borrowers.

The APR also doesn't consider the value of money used for paying lender fees even though you may use it to get a low rate on your mortgage. Until and unless the fees are added to the closing costs, the lenders won't consider it when they calculate APR.

Here's an example to show why you shouldn't compare loans just by the APRs on offer. Just check out the calculation on how to compare loans with different APR explained below. It will give the idea as to what other factors (besides Annual Percentage Rate) should be considered while comparing loans and which lender has the better offer for you.

Let's consider 2 mortgages - X and Y, both being fixed rate mortgages of the same amount and loan term (30 years).

Loan X has the following details:

Mortgage amount = $200,000
Interest rate = 6%
APR = 6.25%
Lender fees = $5000

The amount financed (loan amount minus fees, points, etc) = $(200,000 – 5000) = $195,000.

Using the FRM calculator, the monthly payment = $ 1199.10

Loan Y has the following details:

Mortgage Amount = $200,000
Interest = 6.25%
APR = 6.45%
Lender fees = 1500

The amount financed = $(200000 – 1500) = $198,500

Using the FRM calculator, the monthly payment = $ 1231.43
The monthly payments on loan X and loan Y differ by = $(1231.43 - 1199.1) = $32.33

From the calculation on loan comparison with different APR explained above, we see that loan X has a low Annual Percentage Rate and requires you to pay lower monthly payment as compared to loan Y. But you need to pay higher lender fees for loan X whereas if you go for loan Y, you can save $(5000 – 1500) = $3500 in fees.

On the other hand, if you go for loan X, you'll save only $32.33 on a monthly basis. Using this savings, you can recoup the $3500 in = (3500/32.33) = 108 months or 9 years. If you'd like to sell the property within the 9 year period, then you won't be able to recoup the extra fees. In such a case, loan Y will cost you less. So, if you'd like to relocate within a short term, say 5-6 years, then loan X isn't the right one for you. Thus, a loan with a higher APR and low fees may be a better option than one with a low APR and higher fees.
 
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Mini Profile  Bill
Bill


Joined: 21 Mar 2006
Posts: 83
Location: Illinois

3.55 Dollars($)

Post     Post subject:

Sam,

I appreciate your explanation of APR ... however, as a lender I take exception to suggesting to consumers that APR is beneficial tool when comparison shopping for a mortgage.

A loan with a lower APR is not necessarily based on a better rate and/or less fees.

The truth is that APR is a very poor way to comparison shop due to the fact that APR can be manipulated by lenders and can cause borrowers to make costly wrong decisions.

I personally suggest that each and every borrower comparison shopping for a mortgage simply obtain a Good Faith Estimate from competing lenders and compare the true note rate of interest along with the total fees charged against the competing offer. This is the REAL comparison you are looking for when shopping for a mortgage!

Hope this helps!

_________________
Bill Clanton is a Mortgage Specialist and Manager of State Street Mortgage of Illinois. StateStreetMortgage.Net
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tat808

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Post     Post subject: closing costs

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













OK THIS IS A JOKE..LETS BREAK IT DOWN !
#802- I ACTUALLY HAVE TO PAY TO GET THIS CRAPPY RATE(HE DIDNT EVEN TELL ME I WAS PAYING THIS.I GOT A BETTER RATE VIA 2 OTHER LENDERS WITHOUT ANY POINTS OR DISCOUNT FEES AT ALL!!!!
#803- VALID AMOUNT IF HIS APPRAISER WAS NOT ON THE PAYROLL!!TRY TO PROVE TO ME THAT APPRAISER MAKES ANYWHERE NEAR $350 PER HR
#804- VALID........ASK FOR RECIEPT
#806- PURE JUNK FEE!!!!.....I HAVE TO PAY THE APPRAISER'S MANAGER TOO??LOLOL
#807- JUNK FEE!!
#808- VALID.....ASK FOR RECIEPT!!
#901- DELIBERATELY LEFT OUT OF TOTAL COSTS BUT NECESSARY.THIS WOULD BE ONE OF THOSE LAST MINUTE SURPRISES TO THOSE WHO DO NOT KNOW BETTER!!!
#902- DELIBERATELY LEFT OUT OF TOTAL COSTS BUT NECESSARY.THIS WOULD BE ONE OF THOSE LAST MINUTE SURPRISES TO THOSE WHO DO NOT KNOW BETTER!!!
#903- DELIBERATELY LEFT OUT OF TOTAL COSTS BUT NECESSARY.THIS WOULD BE ONE OF THOSE LAST MINUTE SURPRISES TO THOSE WHO DO NOT KNOW BETTER!!!
#1101- VALID UNLESS THE TITLE AGENT DOES THE CLOSING IN HIS OWN OFFICE.....THIS FEE IS SUPPOSED TO COVER THE MEETING PLACE AND THATS ALL.
#1102- DELIBERATELY LEFT OUT OF TOTAL COSTS BUT NECESSARY.THIS WOULD BE ONE OF THOSE LAST MINUTE SURPRISES TO THOSE WHO DO NOT KNOW BETTER!!!THIS SERVICE CAN RUN $150-$225.ASK IF TITLE AGENT HAS A GUY ON THE PAYROLL DOING THIS...IF NOT ASK FOR RECIEPT!!!
#1111- PURE JUNK FEE!!
#1112- VALID IF NEEDED...ASK FOR RECIEPT!!!
#1113- JUNK FEE!!!!
#1201B-IT NEVER COSTS THAT MUCH!!!ASK FOR RECIEPT!
#1301- VALID IF NEEDED...ASK FOR RECIEPT!!!



THERE IS AT LEAST 500 OR MORE IN JUNK FEES AND ABOUT 1500 IN FEES THAT WILL BE A SURPRISE AT CLOSING GUARRANTEED!!OH...AND THEY WILL SAY " WE ARE THE NUMBER 1 ONLINE LENDER" AT LEAST 15 TIMES BY THE TIME YOUR CONVERSATION IS FINISHED.....PROBABLY #1 AT SCREWING PEOPLE!!!

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David Abernathy

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Post     Post subject:

Thanks for sharing the information. I also feel there are lots of junk fees included in the list you have provided.
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surnarymborma

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Post     Post subject: Hello

I'm new here, just wanted to say hello and introduce myself.
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Mac_7

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0.10 Dollars($)

Post     Post subject:

hello surnarymborma,

good to know that you want to introduce yourself but you haven't said anyuthing about yourself.
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Matthew Bui

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0.10 Dollars($)

Post     Post subject: Good Faith Estimates

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.
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Gene

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0.10 Dollars($)

Post     Post subject: APR

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?
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Gene

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0.10 Dollars($)

Post     Post subject: APR

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.
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Mini Profile  gmakerley
gmakerley
Community Mentor
Community Mentor

Joined: 09 Nov 2007
Posts: 9186
Location: bloomfield, ct

35.63 Dollars($)

Post     Post subject:

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?
_________________
George M. Akerley
Loan Consultant

860-221-5044
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