“FAQ #9 ……… Why Is The APR Higher Than The Mortgage Interest Rate?” First time Homebuyers are especially confused by the Truth in Lending Document that is presented to everyone at the beginning of the mortgage loan process and again at the end. The Document is a required form and it’s designed to make it EASIER to understand the difference in rates quoted from one lender to another.
Steve and I have been loan officers for so long, we remember when WE had to do the Annual Percentage Rate (APR) calculations!
The Annual Percentage Rate (APR) is not only confusing and misunderstood by Borrowers, it is also confusing and misunderstood by many Loan Originators. If you doubt that, just ask the next Loan Originator you meet to tell you what fees go into the APR calculation, and how it is arrived at. But before I address that I want to explain what APR is, and it’s purpose. The idea of the Truth In Lending Disclosure (TILA) is to show you that this is a “for profit” transaction, and that the Lender is going to make hundreds of thousands of dollars on this mortgage loan. With Mortgage Rates expected to continue going up this summer – more people are going to be shopping, and more people will be confused by what they are being quoted, unfortunately.
The Annual Percentage Rate (APR) shown on the Truth in Lending NOT the interest rate. It’s an estimate to show the The interest rate is the rate that makes up the interest portion of your monthly mortgage payment. The APR is simply a calculation that results in a figure that is suppose to reflects the Lender costs in a loan. The purpose of this figure (APR) is to give a Borrower a quick and easy way to determine which Lender has the higher costs. That is all it suppose to do. The difference between the true interest rate, and the APR is the Lender Fees stated as a percentage.
If the Borrower is talking to two Lenders who have the same interest rate for the same loan product, the Lender with the higher APR has the higher Lender Fees. So as you can see the only purpose of the APR is for shopping purposes, and should not be confused with the mortgage interest rate. This is an especially useful tool when you are looking at “No Cost Mortgage Quotes.”
It is interesting how the APR figure is arrived at. The government takes the base loan amount and subtracts the Lender Fees from it. So if the base loan amount is reduced, but the monthly principle and interest figure remains the same, the result in a higher percentage which is reflects the Lender Fees.
The most common Fees that go into the APR are:
- Processing Fee
- Interim Interest
- Underwriting Fee
- PMI Charges
- Escrow Closing Fee
- Debt Cancellation Fees (charged by your current lender if you are refinancing)
- Application Fee
- Appraisal Review Fee
- Flood Certification Fee
- Origination Fee
These are among the most common fees that make up the APR, but any fee that is Lender related is part of the APR.
Fees that are NOT part of the APR are:
- Title Fee
- Attorney Fee
- Recording Fee
- Credit Report Fee
- Appraisal Fee
- Notary Fee
- Home Inspection Fee
- Homeowners Insurance
- Re-Inspection Fees
These fees should reflect correctly no matter who is paying the closing costs. If you are working on a purchase contract that includes a Seller Concession, the APR should still look pretty much the same on the TIL as a quote without the Seller paying closing costs.
We offer the best First Time Home Buyer Programs available at the Best Rates in Raleigh! We also work with the TOP Real Estate professionals in NC, and would be glad to refer you to someone who knows how to structure a contract with the Seller Paying Closing Costs! Connect with us on Google Plus or Facebook! If you have questions about qualifying for a USDA Home Loan in NC, call Steve and Eleanor 919 649 5058