September 1st, 2019 8:23 AM by Jackie A. Graves, President
The Annual Percentage Rate, commonly referred to as the APR, is
an oft-misunderstood term. Granted the mortgage world has a lot of different
terms that can be a head-scratcher sometimes, but the APR is right up near the
top, if not the top, of the list. And the confusion typically starts when
borrowers first receive their initial loan disclosures. The APR is simply
defined as the cost of money borrowed expressed as an annual rate. But even
some loan officers have trouble explaining the APR. Sometimes they can mention
to ignore the APR altogether because it’s not important.
When potential borrowers start making a few phone calls to
different mortgage companies to compare rates, it’s fairly straightforward. The
loan officer answers the phone, gets a little information and provides a rate
quote. Once the borrower decides where to apply, the wheels begin to turn.
Lenders are required by statute to provide certain loan disclosures within
three days of receiving an application. The Loan Estimate will feature the
estimated loan amount, current rate for the day the quote is prepared, and the
APR, among other items. But here’s where it can get tricky.
The rate quoted over the phone is the note rate. That’s the rate
used to calculate the monthly payment. The monthly payment includes both the
principal and interest. If the borrowers choose or are required to have
impounds or escrow accounts, the monthly payment will also include an amount
for taxes and insurance. But when consumers receive their estimate within that
three day period, one of the things they’ll notice is the APR, prominently
displayed. However, the APR won’t be the same as the note rate. Why? Because
the APR takes into consideration not just the interest rate but also additional
fees to pay for other services and documents. These additional services and
documents include both lender and non-lender fees.
The APR was initially designed to help borrowers compare loan
choices among different lenders. And while that’s true in reality it’s not all
that helpful. Why? Rates change daily, sometimes intraday. They proper way to
use the APR is to compare the note rate with the APR. If there is a slight
discrepancy, that means there are lower fees involved. The note rate might be
3.50 percent and the APR 3.52 percent. But if the note rate is 3.50 percent and
the APR is 3.75 percent, there are a lot more fees at play here.
That’s the APR. It’s the cost of money borrowed expressed as an
annual rate. It’s not something to be ignored, but understanding its purpose
and how it’s calculated can help consumers better understand their initial loan
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