Annual Percentage Rate

Written By: Glenn Michaels, Op-Ed Writer

Most borrowers and lenders have heard of the acronym APR but most do not know what goes into the calculated APR. So many folks understand that the APR is a cost but most do not know enough about the acronym called APR.

By definition, annual percentage rate (APR) refers to a percentage number which represents a realistic assessment of yearly costs associated with a loan in addition to mortgage rates, annual percentage rate takes into account any fees or additional costs involved in a loan transaction. The APR functions as a more accurate calculation of yearly costs as compared to relying solely on the note rate used to calculate monthly payments.

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The Function of APR
Due to the numerous types of mortgage loan programs, terms, interest rate arrangements, transaction charges and a variety of other factors it can be difficult for a borrower to determine what the true costs over the life of the loan really is. A prudent borrower examines the APR for each and every mortgage program and should select the lowest APR as it indicates the lowest interest rate and costs over the life of a loan.

Due to the various charges included in APR, including private mortgage insurance, processing fees and discount points, borrowers will need to be carefully evaluate the fees involved in the calculation of the APR and there are non – APR fees as well. A borrower should examine both the APR fees and the Non – APR fees. There are lenders that have more non – APR fees than others and the APR will not be impacted by the APR calculation.

Fees Used to Calculate the APR
The APR takes into account numerous fees associated with mortgage application. The most common fees are:

• Origination fees
• Points
• Buydown Funds from the buyer
• Prepaid mortgage interest
• Mortgage Insurance Premiums
• Lender fees (charges for application, underwriting, tax service fees, etc.)

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Other fees, including title insurance, appraisal charges, and credit check fees, do not factor into APR calculation. Essentially, this is due to the fact that these charges are not levied by the lender and may not be charged for every mortgage transaction.

The APR provides a more reliable method of comparison, borrowers should always carefully each of the fees included in the make an educated decision rather than the APR rate.

I always tell borrowers there is cost for obtaining the loan. The APR reflects that cost.

About The Author

Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter ( As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.