Understanding Annual Percentage Rate (apr) For Mortgage Loans
Posted on December 9, 2007 - Filed Under Business
Annual percentage rate can be defined as the effective interest rate on the loan or the actual cost of credit to the customer. APR is usually determined as an annual percentage of the amount of credit granted while taking into account the one time fees. APRs seldom have any effect over the monthly mortgage payments since different lenders have different methods of calculating APRs.
Annual percentage rate provides an estimate to the borrower regarding the total annual payment including the interest that has to be paid to the lender. APR is calculated through complex mathematical equations. Expenses that are considered during these calculations include discount points accumulated during closing, loan origination fees, mortgage insurance premiums, documentation fees, underwriting fees and any prepaid interest if levied. Several lenders consider these calculations as confusing.
Also included are loan application fees, and credit life insurance is sometimes included in the calculations of APR. A credit life insurance provides insurance towards mortgage payoffs at the time of untimely death of the borrower.
However, there are certain expenses that are not included while calculating an APR. These include title fees, escrow fee, attorney fees, notary fees, appraisal fee, inspection costs, fees for getting credit reports, transfer taxes and also recording fees.
According to Federal Truth in Lending Law, it is mandatory for mortgage companies to advertise the annual percent rates for loans that are being offered. This practice ensures that the lender does not mislead customers by advertising low interest rates. Also, it prevents addition of any other hidden costs or additional expenses that could have a significant impact on the final cost of the loan.
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