What is APR?

APR which stands for Annual Percentage Rate is considered the most important factor when shopping for a home loan.

Why?

APR is actually a way to measure the “full cost” of a loan including both interest rate and loan fees.

It’s expressed as yearly percentage rate.
When it comes to calculating the Annual Percentage Rate or APR All Lenders Calculate It the SAME Way!

While this is far from perfect it does give you a basis to quickly compare different loans costs.

What is included in the APR?

Normally, what is included in the APR are as follows:
* Points
* Pre-paid interest
* Origination fees including loan processing, underwriting and document preparation
* Attorney and notary fees
* Closing agent’s document preparation fees
* Private mortgage insurance (PMI)

What are the APR Limitations?

While the formula for calculating the APR is the same…the closing costs that are included in the APR may not be calculated the same.

There is a big difference on what lenders, mortgage loan officers and even states include in the APR calculations.

In other words they have some “wiggle room”.

They might leave out some things like…

* Appraisal Fee
* Home-Inspection Fees
* Credit Report Costs
* Title Insurance Fees

So, what do I mean by wiggle room?

Well, the costs can be altered.

For example let’s take the prepaid interest (that’s the amount of interest charged from the day of closing to the end of the month).

That can be 1 to 30 days!

That is a big difference in the amount you will have to pay.

Another way to lower the APR is to possibly lower the attorney and notary fees which are included in the APR and increase the title insurance fee which is not included by the same amount.

While I am not trying to say that most mortgage companies or loan officers are intentionally trying to mislead you (they aren’t).

I am saying that not having all the correct information could be costing you more money by choosing the wrong loan for you.

It is important to look closely at each individual charge that is why when searching for a lender and comparing loans the following questions will help you in the decision process.

1)   What is the mortgage interest rate?

2)   What is the total mortgage loan amount?  (Especially if you are putting the closing costs into the loan if you are refinancing your current mortgage)

3)   What is the monthly mortgage payment (principal and interest)?

4)   How much are the closing costs?

It is important written estimate covering all of the above.

When speaking with your loan officer as for both a Good Faith Estimate and a Truth In Lending statements that way you can be fully informed and will be able to make the right decision.

So what is an APR?

An APR is a good starting point and not something to be solely relied on to make a decision for a loan.