Understanding Your Mortgage Loan – What Is APR
As per the federal government, all mortgage lending institutions are legally required to disclose the APR or annual percentage rate whenever a loan program is advertised. But when it comes to understanding your mortgage loan – what is APR and is this something that actually matters to you?
One thing that you should know is that the APR lumps all of the finance charges for your loan right into the loan’s interest rate. As shown below, your finance charges can actually include a number of your closing costs. When the APR for a loan is calculated, these finance charges are added directly to the total amount of interest that must be paid over the duration of your mortgage loan, and then this total number is used to calculate an annual interest rate.
Finance Charges vs. Non-APR Costs
Prepaid Items or Finance Charges and APR Closing Costs
Points and Origination Charges
Underwriting and Processing Fees
Upfront and Monthly Mortgage Insurance
Closing Fees for your Agent (Retained By Your Mortgage Lender)
Tax-related Fees for Service
Wire Transfer and Administrative Fees
Any Interest that you’ve Pre-paid
Pre-paid Items and Non-APR Closing Costs
Fees for the Loan Application
Fees for your Appraisal
Credit Report Charges
Closing Fees that your Mortgage Lender has retained or
Title Insurance and Title Fees
Flood Hazard and Pest Inspection Fees
Stamp and Transfer Fees and Taxes
Escrows that have been Pre-paid for Insurance and Taxes
Here are three facts about APR that most people don’t know:
1. All Points and Closing Costs that the Seller Has Paid Are Excluded From APR
This means that your APR will be a lot lower if the seller is contributing any monies towards your closing costs and points.
2. There’s a Different Formula For The APR for an Adjustable Rate Mortgage or ARM
If you have an ARM or an Adjustable Rate Mortgage, the fully indexed rate is factored into your APR. This represents the interest rate that would be paid if your loan was adjusted right now. For instance, if your ARM has a term of five of seven years, then the loan APR will not be calculated according to the rate that will be paid during the first five or seven years of the loan’s life. It will instead be based upon your interest rate five or seven years from now, provided that the index for today remains the same. Check out Figure 2 to see a full indexed rate.
3. Your APR Does Not Account for the Amount of Time That the Mortgage Will Be Kept
A lot of people keep their mortgages for just five to seven years. You’ll probably sell or refinance your home long before the 15 or 30-year term for your mortgage has gone by. Due to this fact, when comparing options in mortgage loans, you’ll likely do best by considering the total costs for these products over the course of five, seven or 10 years, rather than solely making comparisons of the APR. Keep in mind that the APR is just one measurement of your loan’s cost – and it might not be the best or most accurate measurement for your needs, goals or purposes.
For more information, please contact us at info@onestophomebuyersLLC.com
Reference: http://www.relationshipplanner.com