How Does The APR (Annual Percentage Rate) Affect A Mortgage?

How does the APR (annual percentage rate) affect a mortgage? Compare annual percentage rates between multiple lenders before choosing your mortgage loan. The annual percentage rate, or APR, is expressed...

The annual percentage rate, or APR, is expressed as a yearly rate. The formula used to calculate the APR uses the cost of the credit or loan, the total amount of the money borrowed, and the term. Stephen Edwards of Waterfield Financial Company, the nation's largest privately owned mortgage company, provides this explanation, "Basically, it is just an indication of the cost of the credit to the borrower on an annual basis." Since the APR includes costs in addition to the interest and principal amount of the loan, it will naturally be higher than the interest rate listed.

Edwards continues, "If you are looking at competing lenders, look at the APR rates of both. If one's APR is higher than the others, you need to look at the fees that vendor is charging. I can guarantee that most fees are different." Different vendors charge varying amounts for their fees. Sometimes this is in direct relation to the size of the company, the amount of business the company handles, or the type of loan that is being offered.

Edwards clarifies, "There are two different classes of fees on a loan. You have vendor fees, and you have third party fees." Someone other than the vendor provides services for which they charge fees, third party fees, to the borrower, and these third party fees are independent of the loan.

"Here, at Waterfield, we have ABC vendor. Because of locality, our third party fees are pretty much going to be the same across the board. These are going to be title work, recording fees, closing fees, and maybe an appraisal," says Edwards. "There are third party fees that no vendor has any control over."

Edwards remarks that the only fees that a vendor has control over are the origination fees, the discount points, application, and underwriting. The vendor determines how many points they will charge, what the loan application will cost, and what they will charge for the underwriting. Since the vendor determines these fees, they will vary across the board. He suggests that the borrower "compare two different lenders." Edwards cautions borrowers that they will have their best bet for lower mortgage fees by comparing vendors.

Furthermore, he instructs borrowers to ask the vendor specific questions. Rather than asking for the total fees, the borrower should ask, "What are your fees as the vendor," says Edwards. In this way, the borrower can acquire a clear representation of the costs that he will incur should he use that particular vendor. Additionally, if the borrower follows this pattern with more than one vendor, he can compare the costs of each vendor and determine which one will be more beneficial to use in the long run.

Edwards reminds us, "The third party fees are going to be pretty much the same because they [the vendors] have no control over them." The APR, annual percentage rate, does not influence the amount of the monthly mortgage payment. It simply provides a better picture of the annual cost of acquiring the loan.

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