Denver Home Loans – How To Determine the APR Fees on Your Mortgage

denver home loansDenver Home Loans and APR Charges

The Annual Percentage Rate or APR is arguably the most misunderstood if not downright confusing number in residential mortgage lending. What is it? The APR is a requirement of the federal Truth in Lending Act (Regulation Z) as a means to help regulate the way lenders advertise and notify borrowers of their interest rates as a function of loan amount, total one time costs, and terms. This notification will appear in any advertised rate and will be included on the “truth in lending” statement of your loan documents. If there were no costs associated with obtaining the loan the APR would equal the note rate. However, there are costs associated with getting a loan so in an ideal world the APR should allow consumers to compare Denver Home loans with  from multiple lenders and explain the true cost of credit.

The following is a quick list of fees that are customarily included in the APR: Points (either origination or discount), lender fees (underwriting, processing, application, document preparation fees, tax service), mortgage insurance premium, and pre-paid interest. This is where lenders can begin to manipulate the APR. One lender could use twenty-five days pre-paid interest yielding a higher APR and another lender could use one day of pre-paid interest and therefore yield a lower APR. There is no rule that says lenders must use a specific number of days of pre-paid interest in their APR calculation. It is customary to use fifteen days, but that does not mean that each lender will do it that way.

Then there are fees that are not customarily included in the APR like title fees (title insurance, loan closing fees, endorsements, etc.), and fees that go to other third party vendors such as appraisers, credit reporting agencies, or flood certification companies but can still be used to manipulate the APR. A perfect example of this is a credit reporting fee. Most credit reports cost the lender between $10 and $25 to run, but lenders will often “pad” the fee by an amount and not include that in the APR calculation.

Things get very confusing when you begin to compare different loan terms and programs with each other, such as the APRs for 30-year mortgages versus APRs of 15-year mortgages. The interest rates may be higher on 30-year terms but the APRs can be higher on 15-year mortgages because the costs are spread out over a shorter period of time. Lenders can either give you a “best case” scenario or “worst case” scenario for APR on adjustable rate mortgages or something in between.

At this point you are asking, “How do I truly compare Denver Home loans?” The answer is simple, get a copy of a “good faith estimate” outlining what fees made up the APR calculation. Lenders are required to give you a copy of the “good faith estimate” and “truth in lending” statement within a very short window after you have made loan application. If you are comparing loans with the same interest rate, add up all the fees that each lender is charging and the one with the lower fees should be the better deal, keeping in mind that each lender may not include the same fees in the calculation. Be sure to ask each lender what fees they included in their APR calculation. If the lender does not know, it is probably a good idea to find another lender. If you see fees being used in the APR calculation of one lender but not another be sure to ask about them. If you are comparing loans with different interest rates the same basic rules apply. If you see origination or discount fees on one “good faith estimate” but not on another be sure to ask if the fee is buying the rate down.

Lastly, always ask how long the “lock” period is for. One lender may offer you a reasonable rate and APR on a 30-day lock, while another may offer you a better rate and APR on a 15-day lock. This can be deceptive because lenders offer better terms on shorter lock periods and it very rarely takes less than fifteen days to close on a purchase mortgage transaction, because of all the due diligence required for all parties of the transaction.

In the end listen to your gut, it is often more right than your head. Like in everything else in life, if it seems too good to be true, it probably is. And, as I mentioned above, always remember it is okay to ask questions of your lender of Denver Home Loans. If they cannot answer them to your complete satisfaction, it may be time to find someone else.

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