What Is The Difference Between Mortgage Rate And APR?
There is a Difference Between Mortgage Rate And APR. First of all, they are relatively similar, but to explaining it simply, if the cost of your mortgage is high, your APR or Annual Percentage Rate will be higher. The APR is virtually always at least slightly higher than your Interest Rate. There will be a difference between mortgage rate and APR. Most consumers know that the mortgage industry is extremely regulated by both state and federal mortgage regulators and there are strict rules when it comes to advertisement by mortgage companies. Mortgage companies advertising mortgage rates, whether they are advertising it on television, newspaper, or the internet, they need to not just advertise the mortgage rate but also needs to disclose the annual percentage rate. Annual Percentage Rates can easily be manipulated and many times it is worthless, however, mortgage regulators feel it is important to consumers so mortgage companies need to follow the rules.
Definition Of APR: Annual Percentage Rate
This is the definition of an APR: The yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee(s), or points expressed as a percentage.
The Annual Percentage Rate can be looked at in a couple of ways:
- The nominal or non-adjusted simple interest rate. This is simple and straight forward.
- The effective rate, which accumulates compound interest into an account. The effective rate can be calculated many different ways. It depends on how fees are factored into the equation. Unfortunately, there are still varying opinions on how this is done.
What Gets Calculated Into The APR?
What gets calculated into the APR is subject and apparently depends on who has the better lobby. The Title Insurance and real estate attorneys are winning this battle. Title insurance, especially in a state where the attorney traditionally faxes or emails a title request, can be thousands of dollars. However, only the closing fee, a closing protection letter, and some other minor parts of the transaction are even calculated on the APR.
Fees Not Calculated Into The APR
Many fees are actually not figured into the APR, but these fees are still a yearly cost of your mortgage as they are often part of your loan.
Here is a relatively complete, or example list of some APR Fees and non-APR Fees:
- Supplemental Origination
- Title Closing Fee
- Title Update Fee
- CPL or Closing Protection Letter
- Buy Down or Discount Fees unless true locked interest rate reduction
- Upfront FHA Mortgage Insurance or MIP
- Upfront PMI or Private Mortgage Insurance
- 203k Inspection Fees
- Hud Consultant
- Lender or Broker Junk Fees
- Flood Certification Fee
- Interest Rate Related to Credit to borrower for Interest Rate Chosen
- Lenders Title Insurance
- Judgement Search– Junk
- Title Exam- Junk
- Notary Fee
- Abstract Title Search- more Junk
- Settlement Agent- Junk
- Closing Attorney
- Title Insurance Binder—they just make up words for more Junk
- Owners Title Insurance
- Architect and/or Engineering Fees
- Pest Inspection
- Well and Septic Inspection
- Mortgage Payments Escrowed
Different Between Mortgage Rate And APR Defined
Ultimately, your APR is a subjective number in that many costs are not including in its calculation. If you notice, you can spend more on Title Insurance Junk Fees than you ever will on a mortgage.
The way an APR is calculated is by factoring in the APR Fees over the life of the loan. So your APR will be higher than your Interest Rate. There are plenty of free calculators on the inter-web that will help you with this; but ultimately, if you are applying for a mortgage, it seems like each company arrives at the APR a little differently. So all you have to be concerned with is what it your Interest Rate and what are your Costs.