Mortgage APR or the Annual Percentage Rate helps you to determine the total cost of the loan. The Truth in Lending Act (TILA ) has made it necessary that a borrower be informed about the total cost of the loan so that the borrower is not taken for a ride.
Although the Annual Percentage Rate or mortgage "APR" doesn’t influence the monthly mortgage payments, there are many factors that are taken into account while calculating the APR. Some of the parameters that are used to calculate the Annual Percentage Rate are as follows –
• Mortgage insurance premiums
• Origination fees
• Prepaid mortgage interest
• Points
• Application fees
• Tax services
• Fees for document preparation
• Underwriting fees etc
Fees not included while calculating the Annual Percentage Rate include the following –
• Appraisal fees
• Title fees
• Notary fees
• Attorney fees
• Cost of credit reports
• Home inspection fees etc
So, it is important to know the APR when you shop around for a mortgage. But APR also has few drawbacks. Let us see what they are –
No matter how hard regulators try to establish uniform standards related to mortgage lending, but APR or the Annual Percentage Rate doesn’t give the true picture of the loan cost. While calculating the APR, there are some categories of fees that are not taken into account. For instance real estate attorney fees are not a lending cost. This is not paid to the lender but to the attorney. Moreover, attorney fees may not be the same everywhere. Attorney fees is being referred to as “pass through cost” that is in no way related to lending cost. So, there are certain irregularities that may create complications while calculating the APR.
It may be the case, that there are 2 lenders that have the same information but may calculate the APR by using different methods. There are many lenders that calculate the APR using software packages. So, a particular software package will have calculations based on assumptions that are software specific. So, the results may vary widely from one lender to another. Although calculating mortgage APR may have certain pitfalls, the mortgage APR is considered as a starting point for “an ad-hoc comparison of lenders”.
