How Is Mortgage APR Calculated?

 

1. What is APR?

   • The APR on a mortgage loan is the Annual Percentage Rate. The APR does not affect the monthly payment, which is calculated using the principal, interest rate and length of loan.
     The APR always includes discount points, origination points, pre-paid interest, private mortgage insurance, underwriting fees, loan-processing fees and document preparation fees.
     The APR may include the loan application fee and credit life insurance.
     Mortgage APR is designed to prevent lenders from offering low interest rates and hidden fees.
     

   How is APR Calculated

   • As mortgage APR may include the loan application fee and/or credit life insurance fees, there is no clear way to calculate APR. In fact, different lenders use different formulas.
     In general, the APR can be calculated by adding the interest rate plus any additional costs. If two loans have the same interest rate, but one has a lower APR, the one with the lower APR is the better deal.
     APR calculators are available online at many sites, including http://www.mortgagefit.com/calculators/apr.html and http://www.money-zine.com/Calculators/Mortgage-Calculators/Mortgage-APR-Calculator/.
     

   Additional Information

   • APR is used not only in calculating mortgage payments but also in calculating payments for credit cards, auto loans, personal loans and many other loans.
     In any situation, the APR is a good starting point for loan comparison, but it should not be the only comparison. Review the monthly payments and fees included before selecting a home loan.
     Finally, be sure to get a good-faith estimate before committing to a home loan. This document is government-mandated and allows a borrower to see what the monthly mortgage payment will be and all fees associated with a loan.