WHAT IS APR?
The federal government requires mortgage lenders to disclose the “annual percentage rate” (APR) whenever they advertise a loan program. APR is calculated by adding some of the costs you pay at closing to the total interest you’ll pay over the life of the mortgage. An annual interest rate is then calculated based on that total number.
- Here are the closing costs included in APR: Origination Charges and Points, Processing and Underwriting Fees, Mortgage Insurance (monthly and upfront), Closing Agent Fees Retained by the Mortgage Company, or Closing Fees Above What You’d Be Charged if You Paid Cash, Tax-related Service Fees, Administrative and Wire Transfer Fees, Pre-paid Interest
- Here are the closing costs NOT included in APR: Application Fees, Appraisal Fees, Credit Report Fees, Title Fees & Title Insurance, Pest or Flood Hazard Inspection Fees, Stamp and Transfer Taxes, Pre-paid Escrows for Taxes, and Insurance
WHEN IS APR USEFUL?
APR can help you turn the scenarios into an “apples-for-apples” comparison when you compare two loan programs that may have different interest rates and/or closing cost scenarios. For example, is a loan program with a higher interest rate and lower closing costs a better deal than another loan program with a lower interest rate and higher closing costs? Comparing the APR on both programs may be useful in that scenario.
WHEN IS APR NOT USEFUL?
The main problem with APR is that it doesn’t account for how long you will keep the mortgage. Most people don’t keep the same mortgage for its entire term of 15 or 30 years. Chances are that you’ll probably refinance or sell your home at some point before the loan ends in 15 or 30 years. Therefore, when you compare your mortgage options, it’s probably smarter to look at your total costs over 5, 7, or even 10 years vs. focusing entirely on comparing the APR. Remember, APR is simply one measurement of the cost of your loan… and it may not be the most accurate measurement in your situation.