Know what to watch for to get a top offer on a home equity line of credit.
What are fees in APR?
Fees in APR is a term used to highlight the additional costs incurred when getting a loan, such as a mortgage. The annual percentage rate is always higher than the simple interest rate quoted by the lender because it includes other costs, such as loan origination fees.
The APR gives a borrower the true annual interest rate on his mortgage loan, so it’s important to understand what is included in the calculation. The APR is higher than the stated interest rate. To complicate matters, not all lenders include the same charges in the APR, so the homebuyer needs to dig a little deeper.
Typically, most lenders include the following fees in their APR calculations:
- Application and processing fees.
- Legal fees.
- Loan origination fees.
- Broker fees.
- Mortgage underwriter fees.
- Discount points fees.
However, some fees are often excluded, such as:
- Credit-checking fees.
- Property appraisal.
- Homeowners insurance.
- Realtor’s commission.
- Title insurance.
- Stamp duties.
So, when comparing APRs it’s best to establish which fees have been included in the calculation. Other factors that affect the borrower’s APR include:
- The borrower’s credit history.
- The value of the loan compared with the value of the property
- The borrower’s debt-to-income ratio.
Fees in APR example
Nico makes an offer on a home and then starts comparing the costs of mortgage loans. He needs a mortgage for $250,000. One lender offers him an interest rate of 4.2 percent. Nico knows that that percentage does not reflect what the loan will really cost him. Thanks to Regulation Z of the Truth in Lending Act, lenders have to disclose the total interest they charge on a loan. Most of the fees they charge are expressed as an annual percentage rate. The lender that offers the lowest APR is usually the cheapest.
So, Nico looks at the fees the lender has included in the APR:
- 1 percent loan origination fee: $2,500.
- Loan points: 1 percent, $2,500.
- Other closing costs: $900
The additional loan costs come to $5,900. Nico uses Bankrate’s annual percentage rate calculator to get his true APR. He adds the additional loan costs to his loan total. Even though his stated interest rate is 4.2 percent, his APR will be 4.434 percent.