A.P.R.   (Annual Percentage Rate)

APR  is a calculation based on interest rate  plus other finance charges.  

An interest rate  of 8% with very little costs will have an APR  close to the 8% rate, however; an interest rate with 3 points and other fees  will have an APR much higher than 8%. 

The APR  is calculated using the interest charge plus all finance charges.  Regardless of whether the fee is a one-time charge or imposed over the term  of the loan (such as FHA ’s MIP  Insurance) they are still considered finance charges.  The following is a list of some of the more popular charges that are considered “finance charges”:

 Origination Points , Discount Points , Mortgage Broker Fee, Application Fee, Administrative Fee, Lock-In Fee, Pre-paid interest Fee (Interim interest), Mortgage Insurance (upfront premiums and monthly premiums that are impounds or escrow), Pest Inspection , Commitment Fee , Doc Review Fee, Courier Fee, Processing Fee, Tax Service Fee, Warehouse Fee, FHA  upfront MIP , VA  Funding Fee , FHA MIP Impound/Escrow , Wire Transfer fee, 203k Consultant Fee, 203k Inspection Fee, Consultant Fee.

 Note:  The above list is not a complete list.   Check under Regulation Z for a complete list.

Fee’s that are not finance fees  include: 

Appraisal  fee, credit  report, attorney fee, points (paid by the seller), recording fees , flood certification, survey  fee, flood insurance , title , hazard insurance.

Finance charges that are one-time charged paid upfront and in full at closing are called pre-paid finance charges.  APR  is based on the amount financed, not the loan amount.   The amount financed is the loan amount LESS the Prepaid finance charge.   EX:  $100,000 less $3000 in cost = $97,000 (amount financed).  In other words, you are financing $100,000, but will pay $3000 right back to the bank and still making a payment based on $100,000. 

By using a Mortgage calculator , you can figure the approximate APR.   Find the mortgage payment for a particular loan (say $100,000 @ 8% for 30 years=$733.76).  Now, subtract the financing costs (say $3000) from the loan amount and enter this amount ($97,000) into the loan amount on the calculator.  Keeping the same payment ($733.76 based on $100k), press (Interest) and you will see the APR. It should be approximately 8.324%.  Although the actual rate is 8%, the APR is 8.324% because of the financing costs.

In short, if the lender is earning money on the loan, the APR  will be higher than the interest note rate .  The APR is not what the payments are based on.  The payment is based on the interest note rate.   For more detailed information, consult Regulation Z.  Regulation Z implements the Truth-In-Lending  Act (TILA).

Dan Palumbo, Licensed Mortgage Banker with over 20 years experience.

Licensed Mortgage Banker - New Jersey Department of Banking and Insurance; Licensed by the Pennsylvania Department of Banking; Virginia Licensed Mortgage Lender