What is an APR?? Mortgage APR is an often misunderstood loan concept. APR stands for annual percentage rate. Banks are required to communicate the APR on loan products they market to offer consumers a standard for comparing one loan product to the next. APR is different from the interest rate that is often quoted as part of a loan product offering.

Purpose: The Federal Truth in Lending Act, Regulation Z requires that lenders quote both the nominal interest rate and APR for consumers in required loan disclosure documents. The APR includes all costs of financing your loan, including lender closing costs and other fees. This prevents lenders from heavily promoting their interest rates and loading the loans with hidden fees. It allows the consumer to compare one lender’s annualized interest rate against others.

Calculation: The APR is defined as the cost of credit to the borrower in relation to the amount borrowed expressed as a yearly rate,” according to the American Loan Search website. All fees for the loan are added to the interest charged by the lender and then expressed as an annualized rate. APR is usually higher than the stated interest rate because of the addition of other finance fees.

Example: Though it is not always common, it is quite possible that one lender can offer a lower nominal interest rate, but have a higher total cost of financing (APR). For instance, if lender A offers a standard interest rate of 5.0 percent, but charges 1 discount point and a 1 percent origination fee, its APR could potentially be lower than lender B, if it charges a 4.9 percent rate, but charges 2 discount points, a 2 percent origination fee and additional closing costs. Thus, you can have a lower interest rate loan that offers lower monthly payments but has a higher APR because of the more expensive upfront costs.

Other Considerations: While the APR offers a good depiction of one lender’s costs in relation to another, it does not take into account all costs of acquiring a mortgage loan. Home appraisal fees, credit reporting fees and title fees are all common when getting a mortgage, but not included in the APR calculation. These fees are often similar from one lender to the next, but not always. This is why a good-faith estimate, which outlines all costs, is important to review up front. Another important consideration is that APR makes more sense with fixed-rate loans that you maintain for a lengthy period of time. Refinancing or getting out of your loan quickly makes higher upfront costs even less beneficial.

What Fees are included in the APR ? There are some fees that are excluded from the calculation but below you will find fees typically included when calculating APR:

• Origination fees
• Points
• Buydown funds from the buyer
• Prepaid mortgage interest
• Mortgage insurance premiums
• Other lender fees (application, underwriting, tax service, etc.)

Other fees such as title insurance, appraisal and credit are not included in calculating the APR. The idea here is these other fees are not coming from the lender.