APR = annual percentage rate, basically what it will cost you to borrow something, shown as a yearly rate %, can be used to compare many lenders (only when you compare the same type of loan)
While a loan application’s Truth in Lending page will include your APR, many people find comfort in calculating the APR themselves. Be warned that it is not easy to do and unless you have a Masters degree in Applied Mathematics, you will probably need the aid of an online APR calculator.
The basic figures you will need in order to make the calculation are:
1. Loan Amount
2. Your Lending Fees (origination, application, broker fees, etc.)
List of Items not included when calculating APR
3. Interest Rate
4. Your Mortgage Terms
Example
With a Loan of $200,000 @ 6%, the borrower will pay a total of $231,676 in interest over the life of the loan.
If the borrower is charged a total of $10,000 in closing costs, the total cost to borrow the money would be as follows:
$231,676 + $10,000 = $241,676 – the APR calculation is difficult, but there are various calculators on the net to figure out your APR.
In the above example, once the closing costs are factored in, the APR is 6.485% vs. your quoted rate of 6%.
If you have already been presented with your loan documents, your APR can be found on the Truth in Lending page. While the actual calculation of the APR can be quite difficult, what is and is not included in the calculation is relatively easy.
The basic rule of thumb as to what is not included in the APR is whether or not that specific item provides a value outside of simply being charged so that you can get your money. For example, the $300 or so dollars that your appraisal costs is not factored into your APR because you get your house appraised for that fee. Another example of something that is not factored into your APR is title fees. Title fees pay for the expense of the title rep present at your closing and title insurance that covers you in the event you have an unexpected lien on a property you just purchased.
Items like origination fees or points are included in the APR, as they provide no value and just like interest, they are charged solely as a premium for the privilege of borrowing the money.
Not Included in APR: Appraisal Fee, Title Fees (Title Insurance, Escrow fees, Doc Prep Fees), Attorney Fees (In Attorney states only), Notary fee, Home Inspection fees, Recording fee, Transfer taxes, Credit Report Fee
Items Included in APR: Origination Points, Discount Points, Mortgage Insurance (PMI), Broker and Processing Fees, Underwriting Fees, Doc Prep Fees.