What is the annual percentage rate on a mortgage? The relationship between the annual percentage rate and a mortgage translates to the fees that the lender will charge for the loan or credit being borrowed.
"The annual percentage rate is the big black hole," comments Stephen Edwards of Waterfield Financial Company, the nation's largest privately owned mortgage company. "The annual percentage rate on a mortgage (APR) is different than that of an APR on a car loan. It takes into account the actual cost of the credit to the borrower on an annual basis," explains Edwards.
The resulting figure is different than the interest rate that is charged on the loan. The APR takes into account many of the fees that are associated with the mortgage loan. The APR is often higher than the interest rate that is being charged on the mortgage loan. However, this number does not change the amount of your monthly payment. It simply reflects what it is going to cost you overall to acquire and maintain the loan.
For an example, Edwards offers the following scenario, "ABC is offering a rate of 7%, and XYZ is offering a rate of 6%." He continues, "XYZ says we are charging you two discount points. These are 2% of loan amount. On a loan of $100,000, the buyer is going to have to pay $2,000 to XYZ. The APR takes into account that extra $2,000."
Edwards further explains, "This is why the APR sometimes is higher. Most of the time, it is always going to be higher than the interest rate that you are paying on the loan because it takes into account those discount points."
Additionally, Edwards says, "It takes into account origination fees that lender may charge. It may include mortgage insurance premiums and other fees from the lenders such as application, underwriting, tax, and services. The APR takes into account all the fees associated with the loan on a percentage basis."
Not only do lenders charge different interest rates and offer different terms, but also, they charge varying amounts for basic fees that are associated with mortgage loans. Therefore, Edwards notes that "a borrower needs to look at multiple vendors." However, comparisons of lenders should be made using the same loan terms, for example 30-year fixed-rate loans.
Lenders calculate annual percentage rates, developed to help consumers compare loans, differently. Edwards says, "The APR should be published, and the APR will indicate to them [the borrower] what they should do. If it is lot higher than the interest rate, this is a red flag to look at the fees."
Certain fees are generally included in calculating the APR. Edwards cautions that the borrower should "see exactly what that vendor is charging for fees." The borrower should find out exactly what amounts are being charged for the following fees: points, document preparation, underwriting fee, loan processing fee, private mortgage insurance, and the pre-paid interest.
Occasionally, the loan application fee or credit life insurance fee may be included in the calculation as well. Therefore, the borrower should ask if they are included in the APR and if so, what they are. Annual percentage rates can be useful tools in helping the borrower select the right lender and loan for their needs. Every loan applicant should look at the APR being offered by the lenders they are considering for their loan.
