What are effective annual fees? | Bank rate

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The APR, or APR, is an important term when buying a mortgage or looking to refinance. The APR indicates the total annual cost of the loan, including the interest rate, but also the lending fees and other fees that you will have to pay, known as the APR.

What are APR fees?


Definition of the effective annual fees

APR fees are the additional costs involved in taking out a mortgage loan. The APR reflects the annual cost of the loan including the interest rate plus other fees. It is expressed as a percentage, e.g. B. 3.0 percent. APR fees on a mortgage usually include fees such as underwriting fees and discount points.


Under the Truth in Lending Act, lenders are required to provide accurate information about the cost of borrowing so that it is easier for you to compare. The APR indicates these costs.

“When looking for a mortgage, it’s important to compare the APR on the same type of loan, understand all of the fees, and make sure the mortgage payment is in line with your financial goals,” said Judy Brown, senior financial advisor at Berman McAleer in Timonium, Maryland.

However, do not confuse the APR with the interest rate. Although both are percentages, the interest rate is the cost of borrowing before taking into account fees and other charges. Since the APR includes these additional fees, the APR is always higher than the interest rate.

It can be helpful to think of the interest rate as the interest rate that the lender uses to calculate the monthly interest on your mortgage. The APR, on the other hand, includes both the interest rate and some of the fees you have to pay, so it better reflects the total cost of the loan.

When comparing mortgage offers, please refer to the APR on the credit assessment document provided by your lender in the “Comparisons” section on page 3.

Note, however, that not all fees are always included.

“Unfortunately, lenders don’t have to include all fees in their APR calculations,” said Ben Simiskey, director of asset management at Stegent Equity Advisors in Houston, Texas. “It is therefore important for the borrower to clarify with potential lenders exactly what fees they are including in their APR calculation.”

Here’s a closer look at what fees are typically included in the APR and which are not.

Fees included in the APR

Mortgage lenders typically include the following fees in their APR calculations:

Fees in the APR excluded

Here are some mortgage-related fees that are not usually included in the APR calculation:

Example of effective annual fees

For example, let’s say Nico makes an offer on a home and compares the cost of 30-year fixed-rate mortgages. He needs a $ 250,000 mortgage.

A lender offers him a loan with an interest rate of 3 percent. Nico knows that this percentage doesn’t reflect the real cost of the loan, and the lender with the lowest APR is usually the cheapest, especially because they plan to stay in their home for the long term.

So Nico looks at the fees that the lender takes into account in the APR:

  • Issue Fee (1% of the loan amount): USD 2,500
  • Discount Points (1% of the loan amount): USD 2,500
  • Other closing costs: $ 900

These additional borrowing costs are $ 5,900. With this in mind, Nico uses Bankrate’s APR calculator to determine the APR. (For a variable rate mortgage, he would use this ARM loan APR calculator).

He adds the additional cost of borrowing to his loan amount and finds that the APR, which includes the additional fees, is 3.183 percent, even though the advertised rate is 3 percent.

Bottom line

There are several ways to calculate the APR. It is therefore best to clarify with your lender exactly which fees are actually included in an offer. This will help you know if you are making apple-to-apple comparisons between mortgage offers and will give you specific information to use if you need to negotiate some of the fees before taking out the loan.

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