Gustan Cho The Mortgage Expert,
Publish On: July 5, 2020
This Article On Difference Between Mortgage Rate And APR In Home Mortgages
There is a Difference Between Mortgage Rate And APR. First of all, they are relatively similar. To explaining it simply, if the cost of the mortgage is high, the APR or Annual Percentage Rate will be higher. The CFPB has strict rules and regulations in disclosing not just the mortgage rates but the APR.
- The APR is virtually always at least slightly higher than Interest Rate
- There will be a difference between the mortgage rate and APR
- Most consumers know that the mortgage industry is extremely regulated by both state and federal mortgage regulators
- There are strict rules when it comes to the 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
In this article, we will discuss and cover Difference Between Mortgage Rate And APR In Home Mortgages.
Definition Of Annual Percentage Rate
This is the definition of an APR: The yearly cost of a mortgage, including interest, mortgage insurance, and all other fees and costs such as 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 in many different ways
- It depends on how fees are factored into the equation
Unfortunately, there are still varying opinions on how this is done.
Difference Between Mortgage Rate And APR: 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 the mortgage as they are often part of the loan. Here is a relatively complete, or example list of some APR Fees and non-APR Fees:
APR Fees
- Origination
- Supplemental Origination
- Processing
- Underwriting
- Commitment
- Title Closing Fee
- Title Update Fee
- CPL or Closing Protection Letter
- Buy Down or Discount Fees unless truly 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
Non-APR Fees
- Interest Rate Related to Credit to the borrower for Interest Rate Chosen
- Lenders Title Insurance
- Judgment 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
- Survey
- Pest Inspection
- Well and Septic Inspection
- Mortgage Payments Escrowed
Difference Between Mortgage Rate And APR Defined
Ultimately, the APR is a subjective number in that many costs are not including in its calculation. If borrowers notice, they can spend more on Title Insurance Junk Fees than it will ever be on a mortgage.
The way an APR is calculated is by factoring in the APR Fees over the life of the loan. So the APR will be higher than the actual Interest Rate. There are plenty of free calculators on the inter-web that will help borrowers with this; but ultimately, if borrowers are applying for a mortgage, it seems like each company arrives at the APR a little differently. So all borrowers have to be concerned with is what it your Interest Rate and what are the actual costs.
