The Annual Percentage Rate (APR) is one of the most misunderstood numbers there is on the mortgage documentation. Additionally it is the most easily abused and even though it is supposed to exist to protect shoppers can be so misconstrued as to actually harm the shopper. Be that as it may here are fees that must be included in the calculations for APR in the state of Georgia.

The APR is the total cost of the loan over the life of the loan averaged with the base interest rate. For example if you have an interest rate or 4.5% and closing costs of $5000 on a $100,000 loan the .5% APR qualified closing costs would result in an APR of 4.923% while $10,000 in APR qualified closing costs on the same loan would result in an APR of 5.333%

The way this can be abused or manipulated is by charging a higher base rate and shifting the rate commission to cover some of the closing costs. Not that this is necessarily a bad thing but it gives a hint as to how this figure can be manipulated.

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Every loan officer who has done their job for more than a week or so has heard the question. Some loan officers avoid it altogether by simply not sending the Truth In Lending (TIL) until they absolutely are required by law to do so. Why? Because in the top left corner in prominent font is a number that confuses almost every borrower and non-financial insider – the Annual Percentage Rate (APR).

The APR disclosure requirement was sort of a good idea when it came out back in 1968 when there was pretty much just one type of home loan: a 30 year fixed interest mortgage. With time and exotic mortgage solutions the APR became highly obfuscated and even a tool of obfuscation.

Recent changes to the RESPA laws and the injection of the Mortgage Disclosure Information Act (MDIA – call the Mediah by insiders) was supposed to fix what has been broken for years. What it is doing, however, is bottleknecking the process for almost everyone who is using a mortgage to purchase or refinance a home.

The main problem and fault with the APR for the last several years has been the ease of manipulating it by how closing costs and other mortgage related fees can be hidden in the loan or rate to obfuscate the APR. The idea behind the forced disclosure of the APR was to give an apples to apples comparison of mortgage costs. It doesn’t work, hasn’t worked and another ignorant piece of legislation designed more to give the appearance of help rather than actual help like MDIA is just another road block to home ownership for home buyers.

If every mortgage was exactly the same, all closing costs had to be line itemed and there were no variations in terms them APR would be a more valuable but still useless tool. Here again the intelligent homebuyer is punished because of the few ignorant ones who refuse to take a moment and look at what is really important about home finance. Am I bitter? No. I’m still going to be making home loans and my clients are still going to be paying for them. It’s just that sometimes it will take them longer to get to the closing table if anything changes with the loan post application and prior to close – in some cases.

In a nutshell the MDIA law says if the APR changes more than .125% (an 1/8th of a point of interest) then the disclosures must be resent and a period of no less than 3 business days must expire. This means changes to any of the APR tracked fees or loan amount. The law does not say whether or not this applies if the APR decreases or increases just if it changes. Some lenders are redisclosing in both directions other only if the APR increases more than .125%

A quick definition of the APR is the actual interest rate plus the other mortgage associated costs expressed as a percentage of the loan amount over the life of the loan. For example if you have a $100,000 loan and your APR included costs are $3,500 you would first find out what percentage of $100,000 is made up by $3,500. This one is simple it’s 3.5% but that has to be annualized so divide it by 12 to get .29% and add that to your initial interest rate – let’s say 6% to get 6.29%. So in this scenario our interest rate is 6% but our APR is 6.29% – so you can imagine why people see that TIL and call immediately and say, “I thought I was getting a 6% loan!”? When you indicate that is correct they invariably say, “But this paper says 6/29%” When explained to the masses they simply say “oh” and just forget about it!

So what fees affect the APR? I’m so glad you asked. But the answer is variable by the state wherein the property is located. I can give you the ones for Georgia as a reference but your state may be different. Remember all of these fees may not actually be on your loan but if they are they are to be added to the APR.

Georgia APR fees include: processing, underwriting, origination, discount points, broker fees, commitment fee, lock fee, attorney’s fee, wire fee, disbursement fee, warehouse fee, amortization schedule fee, copy fee, fax fee, courier fee. There are other fees that may be charged but these are the fees that affect the APR. (These fees may even change from lender to lender believe it or not.)

If you are an agent, home owner or home buyer with questions about APR feel free to call me anytime on my cell at 678-439-8683 and I’ll be happy to help you as much as possible.

Most home owners and home buyers have no idea what APR (Annual Percentage Rate) is. I know this because of the over 3000 borrowers I have dealt with a very large percentage have questioned it. Oddly enough most loan officers don’t fully understand APR and those who do often understand it just enough to manipulate it to make theirs look lower than someone else’s.

The APR has been a major part of the home buying process since 1974 when the current Truth In Lending (TIL) form was introduced as a result of the Truth In Lending Act (TILA). It was “supposed” to give shoppers a level shopping ground for comparing rates and closing costs. All it did in actuality is allow savvy salesmen to manipulate yet another number to confuse the borrowing public.

What the APR is supposed to be is the base interest rate plus the cost of closing calculated as a percent of the loan and spread over the life of the loan. In other words if your closing costs are $5000 on a $100,000 loan that would be 5% divided by 12 months (annualized)? would be .416% so add that to the original interest rate of 5% and now your APR should be 5.16% – sounds simple, right?

Where it gets complicated is when you start comparing different types of loans, different ways of calculating closing costs, who is paying closing costs, whether there are discount points, etc. For example on that same loan the loan officer may be showing the seller paying some or all of the closing costs so they don’t become an actual part of the buyer’s repayment. Would that make the APR 0% – technically it would. However since all fees still must be disclosed it does not. The procedure is flawed and it’s not the worst way to shop for a mortgage but it’s close.

The MOST important things about a mortgage are the following:

1. Down Payment – how much equity participation are you establishing in the beginning?
2. Loan Amount – what is the actual amount borrowed?
3. Terms of the Loan – is it fixed or adjustable? When is it due? How many payments are to be made?
4. Total of Payments – if you pay the loan off full term how much will you repay?
5. Monthly Payment (Principal and Interest) – this is where the rubber meets the road.

Closing costs and discount points can be manipulated and disguised. Interest rates can be adjustable and that’s tricky unless you understand floor, index, margin, cap, and period. That’s an entirely different post in itself. Furthermore not all “costs paid at closing” are a part of the APR. In fact unless the fee is a direct result of the loan finance it is not a part of the APR. That’s where I’ve seen a lot of TIL forms not properly completed – especially by some of the bigger lenders and banks.

If I were shopping for a mortgage today I would not look at the annual percentage rate as much as the 5 items listed above. If I like all of them and they are better than what another lender offered then I would take it.

Try this simple Excel file [download]