APR Fees on Mortgages | A Clear Guide for Homebuyers

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Are you also picturing yourself at the mortgage market and suddenly you're encountering terms like "annual percentage rate" or APR. This single figure encapsulates both the loan's interest rate and associated fees. Since lenders vary in the fees they charge, it's crucial to grasp which costs contribute to the APR you're presented with. Here's a breakdown of what you should be on the lookout for.

What are APR fees?

APR fees are basically the extra expenses you pay when you borrow money for a mortgage. While the interest rate is what you pay for borrowing, APR includes that and lender upfront fees on a mortgage. These fees might cover things like starting your loan, closing costs, or other charges during the mortgage process. Knowing about APR fees helps you figure out how much your mortgage really costs and compare offers from different lenders.

What’s included in the APR breakdown?

Digging into the APR breakdown is like lifting the lid on a box full of money secrets! Here's a closer look at what you'll find inside:

• Interest Rate: This is the percentage charged by the lender for borrowing the money. It's the core component of your APR and influences your monthly payments.

• Origination Fees: Think of this as the cost of initiating your mortgage. It covers the administrative tasks involved in processing your loan application.

• Mortgage Broker Fees: If you're working with a mortgage broker, they may charge fees for their services in helping you find a suitable lender and mortgage product.

  ⚡Pro Tip -

  Lenders fees on a mortgage depends on how to figure out the APR by choosing which fees and charges to include or leave out.

  
  

• Points: Sometimes, mortgage lenders offer the option to pay points upfront to lower your interest rate. Each point typically costs 1% of your total loan amount.

• Mortgage Insurance: Depending on your loan type and down payment amount, you may be required to pay for mortgage insurance to protect the lender in case of default.

• Closing Costs: These encompass a variety of fees associated with finalizing your mortgage, such as appraisal fees, title insurance, and attorney fees.

• Discount Points: Unlike origination points, discount points are prepaid interest that can reduce your mortgage interest rate over the life of the loan.

What’s not covered in APR fees?

While APR paints a broad picture of mortgage expenses, it fails to cover some significant costs.

• Closing Costs: These fees cover various expenses incurred during the closing process, such as appraisal fees, title insurance, and attorney fees.

• Credit Report Fees: Lenders often require a credit report to assess your creditworthiness, but the fee for obtaining this report is not part of the APR.

  💡Important Note

  Credit card issuers have the authority to raise the interest rate on new purchases. However, this increase doesn't apply to existing balances, provided they give you a notice period of 45 days beforehand.

  
  

• Homeowner's Insurance: Protecting your investment with homeowner's insurance is essential, but it's not factored into the APR.

• Property Taxes: Depending on where you live, property taxes can significantly impact your monthly expenses. However, they're not part of the APR calculation.

• Private Mortgage Insurance (PMI): If your down payment is less than 20%, you may need PMI, but it's separate from the APR.

• Home Maintenance Costs: While not directly related to the mortgage, maintaining your home is a recurring expense that should be budgeted for separately.

• Homeowner Association (HOA) Fees: If you're buying a property in a managed community, HOA fees aren't included in the APR.

• Home Inspection Fees: Before purchasing a home, it's wise to have it inspected, but this cost isn't factored into the APR.

• Flood Certification: In areas prone to flooding, a flood certification may be required, but it's not part of the APR calculation.

• Appraisal Fees: Assessing the value of the property through an appraisal is essential but considered a separate cost from the APR.

• Prepaid Expenses: Expenses like prepaid interest, homeowner's insurance premiums, and property taxes paid at closing aren't reflected in the APR.

Simple steps to calculate APR fees

If you're skeptical about the lender's calculations, you can independently determine the APR by following these steps:

1. Add together the total interest and fees you'll pay throughout the loan's term.

2. Divide that sum by your loan principal.

3. Then, divide the result by the number of days in the loan term.

4. Multiply this outcome by 365.

5. Finally, convert this figure to a percentage by multiplying by 100.

Alternatively, if you prefer a more streamlined approach, you can use KreditSanta’s mortgage APR calculator. Simply input your loan details, and you'll receive a comprehensive repayment schedule, either annually or monthly, without the need for manual calculations.

Example of APR fees

To better understand how APR fees can impact your mortgage, let's consider an example scenario:

Scenario:

You're in the market for a mortgage to buy your dream home. You've received two offers:

• ➙ Offer from Lender A: They offer a 30-year fixed-rate mortgage at an interest rate of 4%. However, they charge $3,000 in lender upfront fees on a mortgage, including origination fees, appraisal fees, and mortgage closing costs.

• ➙ Offer from Lender B: This lender also offers a 30-year fixed-rate mortgage, but their interest rate is slightly higher at 4.25%. However, their upfront fees are only $1,500, which include similar costs as Lender A.

Calculations:

• ➙ Lender A's APR Calculation: You add the interest rate (4%) to the upfront fees ($3,000). So, the APR for Lender A is 4% + $3,000 = 4.25%.

• ➙ Lender B's APR Calculation: Similarly, you add the interest rate (4.25%) to the upfront fees ($1,500). The APR for Lender B is 4.25% + $1,500 = 4.5%.

Analysis:

• Despite Lender B's slightly higher interest rate, their lower upfront fees result in a lower APR compared to Lender A.

• This means that over the life of the loan, you may end up paying less with Lender B, even though their interest rate is higher initially.

• Understanding APR fees allows you to compare mortgage offers more effectively and choose the option that best fits your financial goals and situation.

Frequently Asked Questions