What Does Your Mortgage APR Indicate?

by Jason on December 2, 2009

You’ve seen it a thousand times – but perhaps you haven’t given it much thought.  What does A.P.R. stand for and what should we be aware of when it comes to these three little letters?  Let’s face it, mortgage financing can be confusing, but it doesn’t have to be.

Mortgage APR or Annual Percentage Rate helps you assess the total cost of the loan in percentage terms when you are trying to calculate your mortgage interest.

Photo Credit: WoodleyWonderWorks

If your mortgage attracts an average mortgage apr of 10%, it means that you will be required to shell out $10 for every $100 you borrow yearly. Borrowers usually try to get a mortgage loan that has the lowest APR.

Mortgage APR however doesn’t affect your monthly mortgage payments. This is because your monthly mortgage payments take into account the mortgage interest rate and not the APR.

 What does mortgage APR include?

The APR includes the following in its calculations-

  • Pre paid interests
  • Points
  • Underwriting fees
  • Loan processing fees etc.
  • Fees for preparing documents
  • Private mortgage insurance

In addition to the above, under certain circumstances, a credit life insurance and loan application fee may be included as well.

Fees excluded from APR calculation

The mortgage APR doesn’t take into account the following types of fees in its calculation:

  • Appraisal fees
  • Notary fees
  • Attorney fees
  • Transfer taxes
  • Fees from Escrow and Title
  • Credit Reporting fees
  • Recording fees
  • Home Inspection fees etc

In other words, the mortgage APR helps you to find out the amount you have to pay as closing cost. It is mandatory as per Federal Truth in Lending Laws that the lender has to disclose the mortgage APR to the borrower.

It is important that you compare the rates from one lender to another. You can also compare the Annual Percentage Rate online.

It helps to shop around for the best deal. It is also important to remember that getting a low mortgage APR doesn’t necessarily mean that you are getting a good deal.

Check the APR and read the fine print before signing the agreement when you opt for a mortgage.

This has been a guest post from Sandy Thomason from the Mortgage Fit Community – a community where members provide personalized guidance on mortgage questions.

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