Show of hands, how many of you out there are still confused by the APR vs Mortgage Interest Rate? Come on, truthfully? Well here is a refresher in case you forgot. I do all the time and I am in real estate for a living.
THE APR: The Annual Percentage Rate is a formula that combines the mortgage loans interest costs with a whole host of other fees associated with the loan over the life of the loan. The total of the interest rates and the fees for the loan are what we call the Annual Percentage Rate or APR. Because this combines the interest rate and the fees it is a better indicator of the true loan cost. It is considered a smart investing practice to use the APR when comparing loan interest rates. Typical costs included in the APR are:
- Points – both origination and discount
- Underwriting, loan processing, and document prep fees
- commitment fee
- attorney and or title closing fees
- PMI (private mortgage insurance) or MIP for FHA (Mortgage insurance premium)
- Prepaid interest – Interest that is paid from the time that you close to the end of the month. The problem here is that some lenders put 1 day or 5 days down on your good faith estimate. Even if they don’t know your closing date.
- Sometimes property taxes are also included. Check with your lender to get an exact list of what makes up your APR.
Not included in the APR are Appraisal fees, credit report fees, recording fees and Title fees.
The Mortgage Interest Rate: This is usually the straight rate that is published by a bank when marketing interest rates for your business. How many of you look at, or receive emails from Mortgage Brokers or Lending Institutions that tell you that mortgage rates are as low as (name your percentage)? These rates do NOT include the true cost of the loan. That is why they are best not used to compare rates from one lender to the other. Especially as an investor. Find out the APR and use that instead.
But wait, there is more. Have you heard of The Truth in Lending Act? The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed. Basically the lenders cannot do a bait and switch on you by posting really low rates and then hitting you up for a ton of extra hidden fees after you sign the loan.