Mortgage APR or the Annual Percentage Rate is the total cost of the mortgage loan that you take out. The US Government has made it mandatory for mortgage lenders to quote the Annual Percentage Rate to the prospective borrowers.
With the help of a mortgage APR, you can compare various mortgage products offered by lenders. It doesn’t influence your monthly mortgage payment which is determined by the mortgage rate of interest prevailing in the market.
When you approach a mortgage lender for a mortgage, you will be given 2 figures that are of prime importance. One is the mortgage interest rate and the other is the mortgage APR. The latter is always higher than the mortgage rate of interest. This is because the APR includes different types of fees and other costs associated with the mortgage you take out. However, the mortgage interest rate doesn’t include all these.
Given below are the fees that are included while calculating the Annual Percentage Rate on your mortgage –
- Origination points
- Loan processing fee
- Pre-paid interest amount
- Fee for preparing document
- Fee for underwriting
- Discount points
- PMI or Private Mortgage Insurance if it is applicable
In addition to the above, fees that are sometimes included while calculating the mortgage APR include the following –
- Loan application fee
- Cost of mortgage life insurance
Fees that are seldom included in mortgage APR calculation include the following –
- Costs for home inspection
- Attorney fee
- Appraisal fee
- Transfer taxes
- Document preparation cost
- Title fee
- Escrow fee
- Recording fee
- Credit report
- Notary fee
Incidentally, mortgage APR doesn’t always give the true cost of a mortgage. This is because 2 mortgage lenders may not calculate the mortgage APR taking the same set of fees into account. Since a mortgage Annual Percentage Rate may not give you the true cost of a mortgage, you can use this figure only in the following cases –
- Use it only for the purpose of comparison
- Make sure you identify the costs and the fees that have been included while calculating the total cost of the loan. Ask your mortgage lender to help you in this regard.
- Mortgage APR is good for comparing loans that are similar in nature.
In order to get the best deal shop around for a mortgage lender who will address your mortgage needs. It is important to be financially equipped and assess your affordability before you settle for your dream home.