Why is my APR 5% when you said I was getting a 4.625% interest rate on my loan? this is one of the most common questions we get on a mortgage when folks review their Disclosure Forms. I want to shed some light on this situation for you. I came across this post on Activerain the other day and thought it would be helpful for you all. I'm not too proud to shared great work from other lenders around the country so please take a minute and read what George Souto has written on the topic. If you still have questions on the subject please leave a comment and we will open up a discussion here.
And keep in mind, if you are comparing several lenders the greater the difference between the APR and the interest rate, the more expensive your loan is. So don't just go out and pick a lender based on the quoted rate.
One of the most frequently asked questions I get from Borrowers when we go over the Truth In Lending Statement is Why Is The Annual Percentage Rate (APR) Higher Than The Interest Rate? The (APR) is probably the most misunderstood and confusing elements in the loan process.
The APR is not only confusing and misunderstood by Borrowers, it is also confusing and misunderstood by Loan Originators as well. If you doubt that, just ask the next Loan Originator you speak to, to explain what the APR is, and what fees go into the APR calculation? The odds are most Loan Originators are not going to be able to provide a good answer, or will most likely give a very vague one. So if those who make a living originating loans have a difficult time explaining how the APR is arrived at, how can anyone expect a Borrower to understand it?Let's first make one thing very clear, the APR is NOT an interest rate. The interest rate is the rate which makes up the interest portion of a mortgage payment. As oppose to the APR which is simply a calculation that is expressed as a percentage (%) which is suppose to reflects the Lender Fees 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 fees. So if two Lenders have the same interest rate for the same loan product, the Lender with the higher APR has the higher Lender Fees.That in a nutshell is all the APR is meant to be. If those reading this blog remember nothing else, please remember this:
- The APR is NOT an Interest Rate
- The APR IS is a percentage which reflects costs
- The intent of the APR is for Shopping Purposes
It is interesting how the APR percentage is arrived at. The government takes the base loan amount and subtracts the fees which make up the APR 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 reflects the Lender Fees.The most common Fees that go into the APR are:
- Points
- Processing Fee
- Underwriting Fee
- Closing Fee
- Application Fee
- Appraisal Review Fee
- Lender Inspection Fee
- Wire Transfer Fee
- Flood Certification Fee
- Broker Fee
All these are not charged by all Lender, generally a combination of these fees are what is charged and they vary from Lender to Lender. But these are among the fees most commonly charged which make up the APR. The important thing to remember is that any fee which 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
- Taxes
- Homeowners Insurance
- Re-Inspection Fees
I hope the above explanation has made it easier to understand Why The Annual Percentage Rate (APR) Is Higher Than The Interest Rate?Note:One more thing, a Lender is required to state the APR every time the Lender quotes an interest verbally or in writing.
