FHA - Conventional - APR vs Rate -- Understanding the difference.......

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Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

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Aren't mortgages confusing enough? It doesn't matter if it's a FHA, conventional, VA, or subprime mortgage. Let's add some more confusion. Most of us know what the rate is in regards to mortgages. Rate :  A charge or payment calculated in relation to a particular sum or quantity: interest rates. (from answer.com)  APR (Annual Percentage Rate) :  Is the cost of your credit expressed as an annual rate. This is a federally required formula, designed to help the borrower compare the cost of credit. The APR rate is different from the note rate of your mortgage and is usually higher than the note rate. Why is this?

The APR is usually different than the rate because the APR includes certain fees which are calculated into the actual rate. The problem with this is that so many people tell you to use the APR as your measuring tool when shopping with other lenders. And each lender by law is suppose to send you a Truth in Lending disclosure which shows you the APR. I'll be breaking down what a Truth in Lending disclosure is in part 2. 

So why does comparing one companies APR with another can be misleading or incorrect?  Because the lender is suppose to include certain fees in this calculation. Not only do some companies leave some of these fees out, but there are other fees that don't have to be included that some lenders might include and the rules are not clearly defined. Sound confusing? Yes and I will talk about this later.

 

So, what fees are included in the APR? These fees are generally included :

  • Points -- both origination and discount
  • Underwriting, loan processing, and document prep fees (these are generally true junk fees)
  • commitment fee
  • attorney or title closing fees
  • PMI (private mortgage insurance) or MIP for FHA (Mortgage insurance premium) financed
  • Prepaid interest - Interest that is paid from the time that you close to the end of the month. The problem here is that some lenders put 1 day or 5 days down on your good faith estimate. Even if they don't know your closing date.

Sometimes included :

  • Application fee
  • Tax related service fee

Generally not included :

  • Appraisal fee
  • Credit report fee
  • Title fee
  • Recording fees

 

 

Conclusion : The overall function of the APR is to measure the 'true cost of the loan'. It's suppose to create fairness and a level playing field amongst other lenders. Getting back to why I think comparing APR's from different companies is a bad idea? As mentioned, some lenders don't know how to compute the APR. Others leave out certain fees that should be included. Lastly, many lenders use programs that help compute the APR and not all of the programs are the same. Blame this on the government for not making it all the same.  

My opinion?  Use the TIL (Truth in Lending disclosure) as a helpful tool to ask questions why it might be higher or lower than another companies disclosure. But go back to the good faith estimate as your real tool. Why? Because all fees are supposed to be shown on this form. I would compare rate, term, and fees and here is a good example of this. (don't compare an arm with a fixed rate or a 30 yr with a 15 yr) Good Faith Estimate -- What to look for when shopping......   Just one word of advice, not every loan officer will be truthful when it comes to the good faith estimate. Some lenders will not show all costs or confuse you by mixing up the different costs. *** And remember this, most of the costs are 3rd party charges which are estimates. You need to decipher what these are in order to shop accurately. Finding a trusted mortgage consultant is very important. 

 

 

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Copyright  © 2007   by Jeff Belonger

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Rainer
25,159
Richard Perkins
R PERKINS REALTY - Stockton, CA
Thanks for the info! keep up the good work!
Oct 06, 2007 01:19 AM #9
Anonymous
Anonymous
Jeff, Glad to have you back.  Great post. Nice way of explaining the ABC's. congrats on the gold star
Oct 06, 2007 06:31 AM #10
Rainmaker
805,892
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate
Nice post Jeff. I think this is a great blog for people getting a loan now. Great info.
Oct 06, 2007 07:19 AM #11
Rainmaker
1,598,331
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Authentic Feng Shui Expert
Jeff, I'm sure your blogs help many people understand loans and what they may be getting into.  I'm sure trying to understand and get a lot of information from you.  Watching Suze Orman the other day she advised against ARM loans for the very same reasons you just posted.....And Congrats on a well deserved feature!!  Have a wonderful weekend.
Oct 06, 2007 07:35 AM #12
Anonymous
Anonymous
Good morning Jeff,
Ok, this is bookmarked for study.  I can't absorb all of that in the quick reads I do here.  Thanks for providing me with more "leisure reading material".  LOL. 
Oct 06, 2007 08:38 AM #13
Rainer
131,625
Susan Trombley
Trombley Real Estate - Raleigh, NC
Broker/Realtor, Raleigh, Cary, Wake Forest, Youngsville

Thanks Jeff.

I have a client that is shopping for the best deal out there and he is comparing the good faith estimate to everyones. He is a realy treat to work with. He shops for the cheapest all the time and not the quality, until I mentioned that maybe he should care if they will get him to closing on time. That sparked interest and I believe he sees the light.

Oct 06, 2007 09:17 AM #14
Ambassador
739,304
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Lisa....  don't worry about being off topic. It's great that you are worried about them and willing to help them. Let me know after you spoken to them to see if they want to talk to me. As I mentioned, I only see one way of possibly doing this.

Tom W. .... thanks for the compliment. This was actually a general post and not just FHA. I put FHA first just for searches.  thanks again...

Alan....  thanks for the polite comment. And yes, you can't fault the usage of the TIL, but it can be very misleading with so many lenders. And yes, depending on your LOS system, you do have a choice and can play with this.

Thesa....thank you very much. There are people out there and you can't blame them, can you?  For shopping and thinking that the cheapest fees with a lower rate is always the best deal. We know that this is not always the case and that sometimes the offer is not worth the paper that it's written on. Time will tell on this on. Thanks again for mentioning my name.

Richard.... thanks for the kind words and for stopping by.

 

Oct 06, 2007 11:22 AM #15
Ambassador
739,304
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Matt...... aka Coach Matt.....   thanks for the polite comments. 

Joe....  thanks for the compliment. I hope it helps others.

Carole....   you don't have to understand everything about mortgages. I do appreciate you taking the time to read this and to comment.  thanks and thanks for the compliment.

Cynthia.....  my pleasure. I hope it helps some.

Susan.....   glad that he sees the light, I hope. So many people just look at what's the cheapest on paper. This is not always the case. But in all honesty, can you blame someone for trying to get the best. It's easier for us to judge since we are in this business.

Oct 06, 2007 04:24 PM #16
Ambassador
739,304
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

PS...  I wanted to thank the moderator who featured this. Thank you.... 

 

Oct 06, 2007 04:31 PM #17
Rainmaker
320,449
Roberta LaRocca
Simply Vegas Real Estate - Las Vegas, NV
REALTORĀ®, Broker, Salesperson, Property Management
Jeff, Very informative.  I am going to bookmark this because I am confused when it comes to loans.
Oct 06, 2007 10:39 PM #18
Ambassador
249,947
Fran Gatti
RE/MAX Coastal Redwoods - Crescent City, CA
Realtor, CDPE, RDCPro - Crescent City CA Real Esta

Jeff,

Amen to your statement, "Finding a trusted mortgage consultant is very important."  Great post.

Oct 06, 2007 11:50 PM #19
Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego
This is one of the more comprehensive explanations of APR I've read.
Oct 07, 2007 01:58 AM #20
Rainer
34,569
John Parker
V.I.P. Independent Mortgage, Inc. - Murphy, TX
Texas Veteran Loan Officer

hmmm. about the best post I have ever seen about the APR...I actually give a class about it to Realtors...Your explanation is excellent....except

The items that you might have forgotten about are:

1. This loan MAY have a PREPAYMENT PENALTY...an FHA loan won't have it...

2. The Adjustable Rate Rider - This loan may adjust when you least expect it!...An FHA loan won't have it!

Oct 07, 2007 02:21 AM #21
Ambassador
739,304
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Roberta L. ....  thank you very much and thanks for stopping by.

Fran....  yes it is and thanks for that warm comment.

Brain.....  thanks for the kind words, especially coming from someone that knows so much about the mortgage business.

John.....  thanks for that polite compliment. But you have me semi confused.  # 1 would be listed on the TIL. I was not explaining the TIL here but just the APR. The TIL is going to be explained in my next blog. And the adjustable rate rider???   This is about the APR, so you lost me there also. In any case, again, thanks for the compliment and for stopping by.

Oct 07, 2007 02:35 AM #22
Rainer
8,519
Pattie Adkins
Pattie Adkins, Broker - Yorba Linda, CA
Excellent way of simplifying a difficult concept!  Its a great post!  Congratulations on the feature! 
Oct 07, 2007 03:22 AM #23
Rainer
26,393
Sharon Filbig
Prudential California Realty - Escondido, CA
San Diego County Real Estate
Jeff, your post is terrific!  I love how you explain things.  Thanks for helping me be a little smarter!
Oct 07, 2007 10:37 AM #24
Rainer
9,065
Kate Crawford
Carolina Home Mortgage - Burlington, NC
Jeff, I am in the process of doing a refinance cash out, I recieved a refer and my underwriter is saying that the most I can do is 85% LTV and I needed 92%.   I do alot of FHA purchases notmany refis, is the underwriter quoting FHA guides or lender guides?  I would appreciate it if you couold answer, thanks  Kate Crawford.
Oct 08, 2007 08:11 PM #25
Rainer
288,485
Diane Aurit
LKN Realty, LLC - Mooresville, NC
Lake Norman Real Estate
Jeff, this is simply a great explanation and so well written and easy to understand!  Would you like to post it on my own Lake Norman blog?  I have guests post on it.  I don't know if you can do loans in NC but let me know what you think!  diane.aurit@earthlink.net
Oct 10, 2007 07:26 AM #26
Rainer
128,954
David A. Podgursky
Boynton Beach & Lake Worth Florida Real Estate Broker Associ - Boynton Beach, FL
PA

this is precisely the point of what I counsel when people are looking at dealing directly with a lender

when the rate is a hair off mine but the APR is more than a hair higher, that means there are some fees that aren't being disclosed

plus when lenders don't have to disclose all fees up front that are associated with closing, it is easy to hide fees that a borrower will just have to accept at closing or risk losing a contract or worse

this post helps people to understand that there is some real math to the number and rhyme to our reason when we can look at another lender's work and give a fair critique

the APR is the real cost of your money... the Rate is just what you're paying monthly....

the example I like is when the TV comes on with a 6.25% fixed rate at a 6.45 APR.... the .2 spread seems insignificant... in a $300,000 loan, the .2% on the payment is a few bucks a month ... but on the APR it can be as much as $20K in fees!

Don't let a lender hide fees... and when you're dealing with a broker, have them explain the GFE line by line...

Oct 13, 2007 10:56 PM #27
Rainer
12,865
Craig Tone
DMZ Mortgage - Seal Beach, CA

That is what I call a detailed post on APR.  It's scary that some lenders don't know how to calculate APR.  TIL compliance is a big thing these days with loan workouts.

Great post!

Jul 04, 2008 06:08 PM #28
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