“FAQ #9 ……… Why Is The APR Higher Than The Interest Rate?”
Frequently Asked Questions #9 in this series of the 10 most FAQ’s that I am asked, is one that is often both
FAQ #9- APR vs. Interest Rate
confusing and misunderstood.
“FAQ #9 ……… Why Is The APR Higher Than The Interest Rate?”
The Annual Percentage Rate (APR) is not only confusing and misunderstood by Borrowers, it is also confusing and misunderstood to many Loan Originators. I you doubt that, just ask the next Loan Originator you meet to tell you what fees go into the APR calculation, and how it is arrived at. But before I address that I want to explain what APR is, and it’s purpose.
APR is NOT an interest rate.
The interest rate is the rate that makes up the interest portion of your monthly mortgage payment. The APR is simply a calculation that results in a figure that is suppose to reflects the Lender costs in a loan. The purpose of this figure (APR) is to give a Borrower a quick and easy way to determine which Lender has the higher costs. That is all it suppose to do. The difference between the true interest rate, and the APR is the Lender Fees stated as a percentage.
If the Borrower is talking to two Lenders who have the same interest rate for the same loan product, the Lender with the higher APR has the higher Lender Fees. So as you can see the only purpose of the APR is for shopping purposes, and should not be confused with the mortgage interest rate.
It is interesting how the APR figure is arrived at. The government takes the base loan amount and subtracts the Lender Fees from it. So if the base loan amount is reduced, but the monthly principle and interest figure remains the same, the result in a higher percentage which is reflects the Lender Fees.
The most common Fees that go into the APR are:
- Points
- Processing Fee
- Underwriting Fee
- Escrow Closing Fee
- Application Fee
- Appraisal Review Fee
- Flood Certification Fee
- Broker Fee
These are among the most common fees that make up the APR, but any fee that is Lender related is part of the APR.
Fees that are NOT part of the APR are:
- Title Fee
- Attorney Fee
- Recording Fee
- Credit Report Fee
- Appraisal Fee
- Notary Fee
- Home Inspection Fee
- Taxes
- Homeowners Insurance
- Re-Inspection Fees
If anyone reading this blog happen to think of any Fees that I might have left out, please feel free to point them out in your comment below.
One more thing, a Lender is not suppose to quote an interest rate verbally or in writing without also quoting the APR. “FAQ #9 ……… Why Is The APR Higher Than The Interest Rate?”
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This blog post is courtesy of my guest blogger, George Souto. About the author and my Guest Mortgage blogger:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com.
Ginny Lacey Gorman is your go to Rhode Island real estate agent for real estate in North Kingstown RI and beyond…knowing the geographic area, schools, happenings, important tidbits of information and businesses well.
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