Annual Percentage Rate Fees
The actual understanding of which fees to include in the APR calculation, varies among banks, brokers and mortgage companies. That is why the APR in the real world is not really a useful comparison tool. The following list was provided to us by a national wholesale mortgage lender as a guide for what they include in their calculations. Use this chart only as an example, not a guarantee. Even this list is open to debate.
The following information
may be out of date
This list should not apply to your situation.
Discuss your APR questions with your lender
Warnings About Annual Percentage Rate Disclosures
To be totally accurate the Annual Percentage Rate can only be calculated based on your specific loan amount and the final closing statement. Any change to closing costs or loan amount affects the APR. Even if the lender fees are right on, the APR can be impacted depending on the choice of title companies and escrow companies. Since all fees charged by independent companies vary and are not known until the closing, the APR will vary from both the initial APR disclosure and final APR sent out with loan documents. The higher the loan amount the LOWER the APR. Its really time for lawmakers to consider again if the APR is helping consumers make better choices. It may be ok for credit cards or even home equity lines of credit, but not mortgages. Too many unknown variables impact final Annual Percentage Rate.
We do not recommend making a final decision on any lender based on the APR quoted to you by phone. It is a well-intentioned law but it is flawed and APR's on Truth In Lending Forms are often wrong. Most web sites offer one APR based on a sample loan amount. Unless your loan amount is exactly the same, your APR will be different than the number quoted. This is why Harp Financial currently discounts the practical importance of APR. We are happy to provide a Good Faith Estimate and a Truth In Lending Disclosure including the APR for your requested loan amount and interest rate with no obligation to apply with us.
We would never pick a lender based on Annual Percentage Rate.
Even after 24 plus years in the mortgage business we aren't positive that our APR calculations are always correct!
If honest lenders debate which items to include in the APR calculation because of their interpretation, how can any borrower know if the information is correct!
It is very easy to manipulate.
Some loan originators intentionally lower the APR to satisfy smart, but unsuspecting shoppers. If you are shopping for the best deal; ask for a list of all fees, rates, and points and ask for a written guarantee if it sounds unbelievable. If a quote is a lot lower than the other quotes you get by more than .250% to .375% in rate --- It is probably not true. Most lenders rates, fees, programs are very similar if the loans are based on Fannie Mae or Freddie Mac guidelines. The initial Truth-In-Lending estimate is often slightly different than the final APR. The better the estimate the more accurate the APR. The extreme examples are applying for the really low rate with 2.50 points or more, the APR can be as much as 1.125% above the note rate. On the other end, a rate at zero points is about one eighth of a percent higher than the note rate. If you take a higher interest rate with a rebate to you to get a no closing cost type loan, the APR is usually lower than the note rate.
Interesting related testimony from, September
16, 1998 regarding:
Want to figure it out?
The current law requires the lender or broker to provide an estimate of third party fees, but with the wide price range for services quoted upfront and then seeing what is actually charged, the Annual Percentage Rate can never really be an accurate number. When enacted the APR was a great idea to protect the consumer, but the current APR disclosure provided by the typical mortgage lender is no longer protecting or informing anyone.
The following information is how it is supposed to work. At least in theory:
The following is HUD's recommendation regarding shopping for a loan:
Comparing Loan Costs. Comparing APRs may be an effective way to shop for a loan. However, you must compare similar loan products for the same loan amount. For example, compare two 30-year fixed rate loans for $100,000. Loan A with an APR of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term. However, before you decide on a loan, you should consider the up-front cash you will be required to pay for each of the two loans as well.
Annual Percentage Rate (APR) Government Definition:
A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules to ensure the accuracy of the annual percentage rate, it provides consumers with a good basis for comparing the cost of loans, including mortgage plans.
Truth in Lending Regulation Z
Regulation Z prescribes uniform methods of computing the cost of credit, disclosure of credit terms, and procedures for resolving errors on certain credit accounts. The credit provisions of the regulation apply to all persons who extend consumer credit more than 25 times a year or, in the case of consumer credit secured by real estate, more than 5 times a year. Consumer credit is generally defined as credit offered or extended to individuals for personal, family, or household purposes, where the credit is repayable in more than four installments or for which a finance charge is imposed.
The major provisions of the regulation require mortgage lenders to:
The Five Categories On A Truth In Lending Disclosure
There are five terms, which are considered to be "material" disclosures required by TILA. While other disclosures are required, these are deemed to be so important that a failure to give any one of them gives rise to the your right to rescind the loan transaction if your home is pledged as security.
Regulation Z 226.23. The terms are:
charge" is defined as the cost of credit over the life of the loan, expressed
as a dollar amount. This includes, not only interest, but also any other
charge, which is required as a condition of receiving credit. Examples include:
"points,” document preparation fees and other fees, which are excessive, compared
to their purpose (like excessive fees for notaries, appraisals, credit reports,
title examinations, etc.). Regulation Z 226.4.
Annual Percentage Rate (APR)
APR is the cost of credit expressed as a percentage. For example, a
loan with an interest rate of 17% may have an APR of 25% (all finance charges
are rolled into the APR). Regulation Z 226.22.
The "amount financed" is also expressed as a dollar amount. It is calculated by taking the principal amount of the loan and subtracting those amounts, which are financed as part of the principal that are considered part of the finance charge. For example: you take out a $100,000 note and deed of trust on your home. The 5 points ($5,000) charged on this loan are financed and are therefore included in the $100,000 principal on the note. However, since the five points are defined as part of the finance charge, they are subtracted from the $100,000 in determining the amount financed ($100,000-$5,000 = $95,000). Regulation Z 226.18 (b).
Schedule of Payments
The "schedule of payments" tell you the day of the month, timing, number, and dollar amount of payments due over the entire course of the loan. Example: 1 payment of $500 on 1-5-96 and 50 payments of $100 on the 5th of each month beginning 2-5-96. Regulation Z 226.18(g). Total of Payments: the "total of payments" is also expressed as a dollar amount. It represents the total dollar cost of the loan to you, assuming all payments are made on time. The total of payments is calculated by adding up all payments disclosed in the schedule of payments.