“Annual Percentage Rates,” or APRs, remain confusing to many borrowers (and to most loan officers). We want to address them again because they are especially confusing with respect to FHA Loans.
The intent of the APR disclosure requirement is good; it is to prevent lenders from advertising unduly low-interest rates without conveying the effective cost of such loans.
An APR effectively re-states one’s interest rate by taking into account the closing costs required to garner the quoted rate or the rate on the promissory note. Closing costs included in the APR calculation include most of the non-recurring closing costs, origination fees, discount points, prepaid interest, monthly mortgage insurance, and upfront mortgage insurance.
The estimated APRs for the “one point,” 80% LTV, $400,000 loans in our Daily Comments (see above) tend to be about 0.20% to 0.25% higher than the actual note rate we quote.
For FHA loans and conventional loans with PMI, APRs are much higher than the note rates. For FHA in particular, APRs are close to 3/4% higher than the note rate in some cases (even for a “no points” loan) because the APR calculation includes all of the Up Front Mortgage Insurance and the monthly mortgage insurance. It is the mortgage insurance requirement that makes FHA APRs so high, and often confusing.
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