APR Mortgage Loans
APR Mortgage Loans
- "APR" stands for annual percentage rate. The APR is a much better indicator than just the interest rate of the actual cost of a mortgage loan, as it is estimates what you will pay over the course of an entire year. The Federal Truth in Lending law requires mortgage companies to list the APR of their loans when they advertise an interest rate. This prevents them from advertising unduly low interest rates and tacking fees and other costs that drive up the real cost of the loan.
APR - Costs
The APR therefore takes into consideration other fees and costs including:
APR - Discount Points
. Commonly referred to simply as "points," these are increments of one percent of the mortgage that you pay off at the closing. If points are not required, and you elect to pay off points to lower your interest rate, it will not be included in the APR. However, if you are required to pay off points, this cost will be factored in when your APR is calculated.
APR - Origination Fees
Often confused with points, this is a fee the lender charges for work they perform on the borrower's behalf.
APR - Mortgage Insurance Premiums
Mortgage insurance premiums.
This is insurance against defaulting on payment of the loan. Your lender may require you to pay mortgage insurance if your down payment is less than 20 percent of the selling price of the home.
APR - Mortgage Loans - Prepaid Mortgage Interest
Prepaid mortgage interest.
Since interest is typically paid on a monthly basis, prepaid mortgage interest is paid at closing to cover the gap between the time you close and the first of the next month.
The APR your lender quotes you will include other fees too, but APR doesn't tell the whole story. There are other fees and costs, such as title insurance, that are still not included in the calculation. And in the end, APR is nothing more than an estimate of the various costs of your loan, including the interest rate. It is not an exact science, since some of the numbers will vary between the time of calculation and the time of closing. Nonetheless, it’s a step in the right direction, and one place to start when comparing lenders and the loans they offer.
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