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  1. What should I know when purchasing a home?
  2. What should I know when refinancing a home?
  3. Should I refinance?
  4. Should I pay points? Does a 0 point/0 fee loan really exist?
  5. What is a FICO score?
  6. Why do mortgage rates change?
  7. What is the difference between pre-qualifying and pre-approval?
  8. What is a rate lock?
  9. Can my loan be sold? What happens if my lender goes out of business?
  10. What is PMI? Can I get rid of the PMI on my loan?
  11. What is an APR?
Or try our Searchable Mortgage Glossary for more information.


Review or regional resources in Colorado , Utah , and Wyoming for more information.

What should I know when purchasing a home?
  1. The strongest position to be in when purchasing a home is to be Pre-Approved. As a potential buyer competing for a property, you'll have a better chance of getting your offer accepted by being as prepared as possible. Consider the following levels of home buyers:
    • Neither pre-qualified nor pre-approved
    • Pre-qualified
    • Pre-approved
    The benefits available at each level can be easily understood when viewed from the seller's perspective. Imagine you're a seller in receipt of multiple offers to purchase your property. A complete stranger (buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, lets consider the type of buyer you'd prefer to deal with.

    Neither pre-qualified nor pre-approved
    This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.

    Pre-qualified
    This buyer has met with a mortgage broker (or lender) and discussed their situation. The buyer has informed the broker regarding their income, expenses, assets and liabilities. The buyer provided you with the brokers opinion of what the buyer can afford.

    Pre-approved
    This buyer has provided a broker written evidence of income, expenses, assets, liabilities and credit. As a result, much of the paperwork for this buyer's loan has been completed. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the broker. You're as certain as possible that this buyer can close.

    As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation and puts you in a much stronger position when negotiating price.

  2. Be sure to compare the total cost, not just rate, when comparing loans. While the rate is important, consider the total cost of your loan including the APR, title fees, origination points, etc. keeping in mind the amount of time you plan to keep the loan or house. A professional broker should be able to provide you with a complete analysis taking all of these important factors into consideration. This will allow you to see several loan programs side by side; providing just the information you need to make an informed decision.
  3. Make sure you receive a Good Faith Estimate and Truth in Lending. This is a written statement of fees associated with the transaction and the law states that you must receive a Good Faith Estimate and Truth in Lending from any Lender or Broker. Keep in mind APRs and Good Faith Estimates can be calculated differently across lenders or brokers; therefore, this does not eliminate the need for a total cost analysis.
  4. Get the rate lock in writing. When you have locked your interest rate, be sure to get in writing the details of the lock.
  5. When buying a home get a professional inspection. Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them. If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow.
  6. Be sure to shop for home insurance before you are ready to close. Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and do not have time to shop around.
  7. Allow for a few extra days in the transaction. While most real estate transactions close on time, there are times when transactions are delayed. A professional broker will work closely with you defining the timeline and keeping you informed throughout the process. By allowing yourself a few extra days and working with a broker that keeps all parties informed, you will help ensure a smooth closing.
  8. Consult with your broker before making any major purchases during the loan process. Remember that your loan approval is based on your total debt compared to your total income. Adding any debt during the loan process can impact this and also may adversely affect your credit, putting your loan at risk.

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What should I know when refinancing a home?
  1. Get a break-even analysis. A professional broker should be able to provide you with a complete analysis taking all of the important factors into consideration, and clearly defining the break-even point, providing just the information you need to make an informed decision. For a rough and very simplified break-even analysis, do the following: Determine the total cost of the transaction, and then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even. Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In this case you'd refinance if you planned to stay in your home for at least 40 months.
  2. Make sure you receive a Good Faith Estimate. This is a written statement of fees associated with the transaction and the law states that you must receive a Good Faith Estimate and Truth in Lending from any Lender or Broker. Keep in mind APRs and Good Faith Estimates can be calculated differently across lenders or brokers; therefore, this does not eliminate the need for a total cost analysis.
  3. Get an idea of your homes value before paying for an appraisal. If you suspect that your home value may be too low for the loan, your mortgage broker should be able to arrange for a comparable search by an appraiser. This will provide you with a range of possible values. Dont waste your money on a full appraisal if you are doubtful about the value of your home.
  4. Provide your documents as quickly as possible. To assist in meeting your closing date and staying within your rate lock period, provide any required documents to your broker as quickly as possible.
  5. Get the rate lock in writing. When you have locked your interest rate, be sure to get in writing the details of the lock.
  6. Consult with your broker before making any major purchases during the loan process. Remember that your loan approval is based on your total debt compared to your total income. Adding any debt during the loan process can impact this and also may adversely affect your credit, putting your loan at risk.

Should I refinance?
The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways:
  1. By obtaining a lower interest rate that causes one's monthly mortgage payment to be reduced.
  2. By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly.
People also refinance to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments. A third reason why homeowners refinance is to consolidate debts and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumers loans are not tax deductible, while a mortgage loan is tax deductible. The answer to the question "Should I refinance?" is a complex one, since every situation is different and no two homeowners are in the exact same situation. Even the conventional wisdom of refinancing only when you can save 2% on your mortgage is not really true. If you are refinancing to save money on your monthly payments, it would be more appropriate to compare the cost of the refinance against the length of time you anticipate owning the home. Contact your Lucidia Group Mortgage Advisor for an in depth analysis. Sometimes, you do not have a choiceyou are forced to refinance. This happens when you have a loan with a balloon provision, but with no conversion option. In this case it is best to refinance a few months before the balloon comes due. Whatever you choose to do, consulting with your seasoned Mortgage Advisor and utilizing the tools available on Lucidiagroup.com can save you time and money.

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Should I pay points? Does a zero-point/zero-fee loan really exist?
The best way to decide whether you should pay points or not is to perform a break-even analysis. You can get a general idea yourself by using the following calculation or contact your Lucidia Group Mortgage Advisor for a free in depth, complete analysis.
  1. Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.
  2. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
  3. Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.
  4. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.
If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!

Zero-Point/Zero-Fee Loans Whatever happened to the conventional wisdom of waiting for the rates to drop 2% before refinancing? You have a 30-year fixed loan at 8.5%. A Mortgage Advisor calls you up and says they can refinance you to a rate of 8.0% with no points and no fees whatsoever. What a dream come true! No appraisal fees, no title fees and not even any junk fees! Is this a deal too good to pass up? How can a bank and broker do this? Doesn't someone have to pay? Whose money is being used to pay these closing costs? Nothis is not a scam. Thousands of homeowners have refinanced using a zero-point/zero-fee loan. Some refinanced multiple times, riding rates all the way down the curve in the recent down trends. Some homeowners used zero-point/zero-fee adjustable loans to refinance and get a new teaser rate every year. The way this works is based on rebate pricing, sometimes also known as yield-spread pricing, and sometimes known as a service-release premium. The basic idea is that you pay a higher rate in exchange for cash up front, which is then used to pay the closing costs. You will pay a higher monthly paymentso the money is really coming from future payments that you will make. You can also think of this as negative points! For example, a 30-year fixed loan may be available at a retail price of :
  • 8.0% with 2 points or
  • 8.25% with 1 point or
  • 8.5% with 0 points or
  • 8.75% with -1 point or
  • 9% with -2 points

What are the benefits of a zero-point/zero-fee loan?
The main benefit is that you have no out-of-pocket costs. As a result, if the rates drop in the future, you could refinance again even for a small drop in rates. So if you refinanced on the zero-point/zero-fee loan to get a rate of 8.75% and if the rates drop 1/2%, you can refinance again to 8.25%. On the other hand, if you refinanced by paying 1 point and got a rate of 8.25%, it may not make sense to refinance again. Now, if the rates drop another 1/2%, a zero-point/zero-fee loan can drop your rate to 7.75%, whereas if you paid points, you may have to do a break-even analysis to decide if refinancing will save you money. The zero-point/zero-fee loan eliminates the need to do a break-even analysis since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates. Some consumers have used zero-point/zero-fee loans on adjustable loans to refinance their adjustables every year and pay a very low teaser rate. What are the disadvantages of a zero-point/zero-fee loan?

The main disadvantage is that you are paying a higher rate than you would be paying if you had paid points and closing costs. If you keep the loan for long enough, you will pay moresince you have higher mortgage payments. In the scenario where you plan to stay in the house for more than 5 years, and if rates never drop for you to refinance, you could wind up paying more money. If, on the other hand, you plan to stay at a property for just 2-3 years, there really is no disadvantage of a zero-point/zero-fee loan.

Whose money is it?
Since you are being paid "cash" up-front in exchange for a higher rate, it really is your own money that will be paid in the future through higher payments. Investors who fund these loans hope that you will keep the loans for long enough to recoup their up-front investment. If you refinance the loans early, both the servicer and the investor could lose money. To summarize, zero-point/zero-fee loans in many cases are good deals. Make sure, however, that the lender pays for your closing costs from rebate points and NOT by increasing your loan amount. So if your old loan amount was $150,000, your new loan amount should also be $150,000. You may have to come up with some money at closing for recurring costs (taxes, insurance, and interest), but you would have to pay for these whether you refinanced or not. Zero-point/zero-fee loans are especially attractive when rates are declining or when you plan to sell your house in less than 2-3 years. Zero-point/zero-fee loans may not be around forever. Lenders have discussed adding a pre-payment penalty to such loans, however few lenders have taken steps to implement such a measure.

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What is a FICO score?
A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports. Credit scores analyze a borrower's credit history considering numerous factors such as:
  • Late payments
  • The amount of time credit has been established
  • The amount of credit used versus the amount of credit available
  • Length of time at present residence
  • Employment history
  • Negative credit information such as bankruptcies, charge-offs, collections, etc.
There are really three FICO scores computed by data provided by each of the three bureausExperian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score. Frequently Asked Questions (FAQs) How can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.
  • Pay your bills on time. Late payments and collections can have a serious impact on your score.
  • Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
  • Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
  • If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
What if there is an error on my credit report? If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well. Back to Top
Why Do Mortgage Rates Change?
To understand why mortgage rates change we must first ask the more general question, "Why do interest rates change?" It is important to realize that there is not one interest rate, but many interest rates!
  • Prime rate: The rate offered to a bank's best customers.
  • Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
  • Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
  • Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
  • Federal Funds Rate: Rates banks charge each other for overnight loans.
  • Federal Discount Rate: Rate New York Fed charges to member banks.
  • Libor: London Interbank Offered Rates. Average London Eurodollar rates.
  • 6 month CD rate: The average rate that you get when you invest in a 6-month CD.
  • 11th District Cost of Funds: Rate determined by averaging a composite of other rates.
  • Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
  • Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.
Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates. This leads to a fundamental concept:
  • Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
  • Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates. Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up! There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturitytypically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

Effect of economic data on rates
Number of arrows indicates potential effect on interest rates.
1 arrow=least effect, 5 arrows=most effect

Economic Event Effect on
Interest Rates 		Significance of event
Consumer Price Index (CPI) Rises Indicates rising inflation.
Dollar Rises Imports cost less; indicates falling inflation.
Durable Goods Orders Increase Indicates expanding economy
Gross National Product Increases Indicates strong economy
Home Sales Increase Indicates strong economy
Housing Starts Rise Indicates strong economy
Industrial Production Rises Indicates strong economy
Business Inventories Rise Indicates weak economy
Leading Indicators (LEI) Increase Indicates strong economy
Personal Income Rises Indicates rising inflation
Personal Spending Rises Indicates rising inflation
Producer Price Index Rises Indicates rising inflation
Retail Sales Increase Indicates strong economy
Treasury Auction Has High Demand High demand leads to lower rates
Unemployment Rises Indicates weak economy
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What is the difference between pre-qualifying and pre-approval?
A pre-qualification is issued by your Mortgage Advisor, who, after interviewing you, determines the dollar value of a loan you can be approved for. However, a pre-qualification is not a commitment to lend. The pre-qualification is used to determine the home value range in alignment with your payment requirements. Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc. At Lucidia Group we utilize Automated Underwriting technology enabling us to pre-approve your loan quickly and easily. When your loan is pre-approved, you are then issued a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having cash in the bank to pay for the house! Back to Top
What is a rate lock?
You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock:
  1. Loan program.
  2. Interest rate.
  3. Points.
  4. Length of the lock.
The longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock. Let's say you lock in a 30-year fixed loan at 8% for 2 points for 15 days on March 2. This lock will expire on March 17 (if March 17 is a holiday then the lock is typically extended to the first working day after the 17th). The lender must disburse funds by March 17th, otherwise your rate lock expires, and your original rate-lock commitment is invalid. The same lock might cost 2.25 points for a 30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate. After a lock expires, most lenders will let you re-lock at the higher of the original rate/points or current rate/points. In most cases you will not get a lower rate if rates drop. Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging. Some lenders do offer free float-downsi.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunchthe free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate. What do you do if the rates drop after you lock? Most lenders will not budge unless the rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let the borrowers improve their rate every time the rates improved, they spend a lot of time relocking interest rates, since rates fluctuate daily. Also they would have to build this option into their rates and borrowers would wind up paying a higher rate. Lock-and-shop programs. Most lenders will let you lock in an interest rate only on a specific property. If you are shopping for a house, some lenders offer a lock-and-shop program that lets you lock in a rate before you find the house. This program is very useful when rates are rising. New-construction rate locks. Most lenders offer long-term locks for new construction. These locks do cost more and may require an up-front deposit. For example, a lender might offer a 180-day lock for 1 point over the cost of a 30-day lock, with 0.5 points being paid up-front, as a non-refundable deposit. Most long-term new-construction locks do offer a float-downi.e. if rates drop prior to closing, you get the better rate. Back to Top
Can my loan be sold? What happens if my lender goes out of business?
Your loan can be sold at any time. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. If your loan has been sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments from now on. If your lender goes out of business, you are still obligated to make payments! Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender's going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to your new lender. Back to Top
What is PMI? Can I get rid of the PMI on my loan?
PMI or Private Mortgage Insurance is normally required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage-insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment. The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment. The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it. To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of cancelling the PMI on your loan is to refinance and to get a new loan without PMI. Back to Top
What is an Annual Percentage Rate (APR)?
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate. Example: 30-year fixed 8% 1 point 8.107% APR The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan. The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees. If life were easy, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong! Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees. The reason why APRs are confusing is because the rules to compute APR are not clearly defined. What fees are included in the APR? The following fees ARE generally included in the APR:
  • Points - both discount points and origination points
  • Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
  • Loan-processing fee
  • Underwriting fee
  • Document-preparation fee
  • Private mortgage-insurance The following fees are SOMETIMES included in the APR:
  • Loan-application fee
  • Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death) The following fees are normally NOT included in the APR:
  • Title or abstract fee
  • Escrow fee
  • Attorney fee
  • Notary fee
  • Document preparation (charged by the closing agent)
  • Home-inspection fees
  • Recording fee
  • Transfer taxes
  • Credit report
  • Appraisal fee
An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock! Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs. Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time. Finally, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs! Conclusion : Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan. Back to Top
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