The Origination Fee
If Lender 2 charges an application fee of $45, an origination fee of 3 percent (because it's cash you pay at closing, it's the same as points if it's expressed as a percentage of the total loan, but it's not always advertised that way), and other fees that total $775 at closing, then the total of those fees ($3,820) is deducted from the actual loan amount of $100,000 ($100,000 - $3,820 = $96,180). To find the APR, you determine the interest rate that would equate to $664.30 for a loan amount of $96,180, which in this case is 7.39 percent.
So there you have it! Although Lender 2 advertised no points, because it charged an origination fee it didn't really offer the best deal. Ask for the APR and compare with other lenders. Also, make sure you know which fees are being included in the APR calculation. Typically, these include: origination fees, points, buydown fees, prepaid mortgage interest, mortgage insurance premiums, application fees, underwriting, etc. -- any fees that are coming directly from the lender, but not fees that you would have to pay using any lender, such as title insurance, appraisals, etc.
Remember those algebra classes back in high school? Well, luckily you don't have to! You won't have to calculate the APR on your own -- the lender will give it to you when it gives you the Federal Truth in Lending Disclosure; you just have to understand its importance. This calculator can help you fill in the missing pieces in the loan formula yourself if you really want to.
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Here are some other things to take into account when you look at the APR.
- The
more you are financing, the less impact all of those fees will have on
the APR, simply because the APR is calculated based on the total loan
amount.
- The length of time you are actually in the home before you sell or refinance has a direct influence on the effective interest rate you ultimately get. For example, if you move or refinance after three years instead of 30, after having paid two points at the loan closing, your effective interest rate for the loan is much higher than if you stay for the full loan term.
Want to know how to manually calculate the interest payments on mortgages? Click here!
