What is Annual Percentage Rate (APR)?

Well, the above question requires comments on two fronts. First, what is APR and second what factors determine the APR?

Let's address the first question; what is APR? By definition the Annual Percentage Rate can be all or one of the following.

1) The cost of credit that consumers pay, expressed as a simple annual percentage.
2) The interest rate reflected as a yearly rate, taking into account points and other fees.
3) The cost of credit as a yearly rate. The percentage results from an equation considering the total amount financed, the finance charges, and the term of the loan. Usually not the same as the interest rate.

Believe or not the list could continue but my personal definition is as follows. "The rate at which the borrowed money costs you with certain closing costs included (i.e. underwriting, processing and courier fees etc.)"

Now let's address the latter question; what factors and/or fees are included/affect the APR? The following fees ARE normally included in calculating the APR.
* Points- both discount and origination
* Pre-paid Interest
* Loan processing fee
* Loan underwriting fee
* Document Preparation Fees
* Private Mortgage Insurance

The following fees are SOMETIMES included.
* Application Fee
* Credit Life Insurance

The following fees are normally NOT included.
* Title/Abstract fee
* Escrow fee
* Attorney fees
* Notary fees
* Home Inspection fees
* Credit report
* Appraisal fee
* Recording fee
* Transfer taxes

The calculation of the APR varies per lender, why? Because as you can see from above different fees can be used to determine the APR. Some lenders will leave out important/necessary fees to skew the actual cost of credit. It is important for you as the client to compare Good Faith Estimates (GFE) and determine whether or not you are getting a good loan at a fair/market cost.

Your Comments Are Welcomed!

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