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lawcain/Getty Images June 16, 2022 Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. The terms, interest rate or annual percentage (APR), are often used interchangeably, but they aren’t quite the same. It’s not uncommon for buyers to focus on the interest rate, but the APR, or annual percentage rate, is also a key term to understand if you’re or looking to refinance. Like the interest rate, the APR represents the all-in yearly cost of the loan. It also includes some, but not all, other fees you’ll have to pay when you get a mortgage.
What are APR fees
Lightbulb APR fees definition are the additional costs incurred when getting a mortgage loan. The APR reflects the annual cost of the loan, including the interest rate plus other charges. It’s expressed as a percentage, such as 3.0 percent. APR fees on a mortgage typically include charges like origination fees and discount points.Under the Truth in Lending Act, lenders are required to provide accurate loan cost information so that you can more easily comparison-shop. The APR indicates this cost. “When looking for a mortgage it is necessary to compare the APR for the same type of loan, understand all the fees, and to make sure the mortgage payment aligns with your financial goals,” says Judy Brown, senior financial adviser at Berman McAleer in Timonium, Maryland. Don’t confuse the , though. Although they are both percentages, the interest rate is the cost of borrowing before including the fees and other charges. Since the APR includes these additional fees, the APR is always higher than the interest rate. It can be helpful to think of the interest rate as the rate the lender uses to calculate the monthly interest on your mortgage. The APR, on the other hand, includes both the interest rate and some of the fees you pay, so it’s meant to be a truer reflection of the total cost of the loan. When comparing mortgage offers, you can find the APR on the loan estimate document provided by your lender, on page three in the “Comparisons” section. Keep in mind, though, that not all charges are always included. “Unfortunately, lenders are not required to include all fees in their calculation of APR,” says Ben Simiskey, director of wealth management at Stegent Equity Advisors in Houston, Texas. “So, it’s important for the borrower to clarify with prospective lenders exactly what fees they are including in their APR calculation.” Here’s a closer look at what fees are typically included in APR and what isn’t.
What fees are included in APR
Mortgage lenders generally include the following fees in their APR calculations: Discount points fees Transaction fees Application and processing fees Prepaid interest Escrow and settlement fees Document preparation fees Legal fees Origination fees Mortgage underwriter fees Certain What fees are not included in APR
Here are some fees related to a mortgage that aren’t usually included in the APR calculation: fees fees fees Document preparation fees Notary fees Credit report fees fees Transfer taxes Pest inspection fees Flood hazard inspection fees Does APR include closing costs
Yes, APR does include most closing costs you’ll incur when buying a new home. You can find a breakdown of these costs on page three of the loan estimate provided by your lender prior to closing.
Example of APR fees
Say Nico makes an offer on a home and is comparing the costs of 30-year, fixed-rate mortgages. He needs a mortgage for $250,000. One lender offers him a loan with an interest rate of 3 percent. Nico knows that percentage doesn’t reflect what the loan will really cost him, and the lender that offers the lowest APR is usually the cheapest, especially because he plans to stay in his home long term. So, Nico looks at the fees the lender included in the APR: Origination fee (1% of loan principal): $2,500 Discount points (1% of loan principal): $2,500 Other closing costs: $900 These additional loan costs come to $5,900. Based on that, Nico uses Bankrate’s to determine the APR. (For an adjustable-rate mortgage, he would use this ). He adds the additional loan costs to his loan total, and finds that even though the quoted interest rate is 3 percent, the APR, which includes the additional fees, is 3.183 percent. Bottom line
There are different ways to calculate APR, so it’s best to clarify with your lender exactly which fees are in fact included in a quote. This helps you to know whether you’re making apples-to-apples and gives you specific information you can use if you want to before closing on the loan. SHARE: Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Related Articles