What Fees Are Included in the APR or Annual Percentage Rate?
Financial lenders calculate the APR or annual percentage rate using a formula that takes into consideration the various expenses associated with the mortgage. Some fees are always calculated into the equation while others are never included. In fact, some fees are considered when calculating the APR by some lenders, but not by others.
This disparity leads to a misleading comparison and increases the difficulty for borrowers in selecting their lender. Perhaps one of the best ways to understand the APR or annual percentage rate is to look at the fees that are included in the calculation as well as those that are associated with a transfer of real estate but not included in the APR calculation.
The fees that are usually included in the APR are:
• Loan processing fee- the fee charged by the lender in order to process the mortgage.
• Document preparation fee- typically paid to the lender or lender's agency for preparing the sale documents.
• Underwriting fee- usually goes to a paid staff member.
• Discount points- the points that a borrower pays to receive a lower interest rate.
• Origination points- the points that a borrower pays to receive a specific interest rate.
• Private mortgage insurance cost, if applicable- the fee that is charged to obtain private mortgage insurance if the down payment is less than 20 % of the value of the home.
• Pre-paid interest amount- the initial amount of interest that is charged on the mortgage.
The fees that are included in the APR some of the time are:
• Credit life insurance cost or the cost of the insurance premiums for a policy that pays the mortgage in the event of the mortgage holder's death.
• Loan application fee or the fee that is charged to process the application.
Fees that are rarely included in the APR because they usually go to third parties are:
• Attorney fee- if one is used.
• Notary fee- typically a minimal fee.
• Title fee- charged by the title company.
• Recording fee- charged by the government office to record the transaction.
• Escrow fee- applied only to first mortgages.
• Credit report- charged by the credit bureau in order to process the report.
• Appraisal fee- charged by a professional appraiser when warranted.
• Transfer taxes- charged by the government for the transfer of the real estate property.
• Document preparation fees- charged by the realtor.
• Home inspection costs- typically paid by the prospective buyer of a property to a legitimate home inspector.
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