What is the Difference Between Mortgage Interest Rate and APR?
The Annual Percentage Rate (APR) is one of the most confusing and misleading parts of the mortgage process. This is a figure that the Federal Government requires all lenders to disclose so you can compare loans offered by lenders. The APR is disclosed on the Federal Truth in Lending form (TIL). This document should always be presented with the Good Faith Estimate (GFE) of closing costs. The APR is meant to level the playing field and deter deceptive practices. The APR shows the real cost of money. It is supposed to factor in the cost to the lender of borrowing the money for your loan, and it is a figure based upon the actual amount financed, and not the amount borrowed, which are usually different.
Sadly, most people in the industry do not even know how the APR is calculated.
We advise our clients to focus on the costs and rate when comparing loans (as a lot of lenders do not know your exact escrow payment to compare mortgage payments). Again the advertised APR is meaningless unless you know exactly how it was calculated and what costs are built in to that rate. Yes you should compare the overall closing costs so see how long one loan will take to recoup the costs over another and this is what the APR is supposed to do. In fact, many times a loan with a lower APR might not be the better choice.
The numbers you do have to compare are your total closing costs and percentage rate charged by the lender, excluding the per diem (daily) interest charges.
There are many costs associated with taking out a mortgage. Some of these include (fees in bold count toward APR):
- Loan Discount Points
- Close of Escrow
- Origination
- Tax Stamps/Transfer Taxes (if state requires one)
- Administration Fees
- Recording Fees
- Per Diem Interest
- Flood Determination Fees
- Tax Service Fees
- Application Fee (Forthright Funding does not have one)
- Commitment Fee (or deposit)
- Courier Fee
- Title Insurance
- Appraisal (if needed)
- Credit Report
- Title Insurance
