Closing Costs: How They Affect Your APR
Compare carefully to determine the best offer.
Disclosure – It's the Law
The Federal Truth in Lending law requires banks, brokers, and mortgage companies to disclose the APR, Annual Percentage Rate, to borrowers when obtaining a loan. APR is an interest rate calculation that includes closing costs as part of the calculation.
APR: the total of the amount borrowed, plus the fees associated with obtaining the loan, as known as Closing Costs. See examples »
Why APR Is Important
So why is this important when shopping for a loan? The APR is one tool to help you compare apples to apples when shopping for credit.
There are two parts to calculating the APR:
- Note Rate (Interest Rate)
- Closing Costs
Note Rate: the actual interest charged on the loan for the length of the loan (for example, 15 years), commonly referred to as the Interest Rate.
Closing Costs: one-time fees and charges incurred in obtaining the money. This is where lenders make a profit.
Closing Costs may include:
- Origination fees
- Appraisal fees
- Home inspection fees
- Underwriting fees
- Title endorsement fees
- Recording fees
- Application fees
- And possibly other fees.
Good Faith Estimate
A Good Faith Estimate and a Truth in Lending Disclosure give you the "estimated" Closing Costs the lender charges for the mortgage. It's up to you to compare them carefully and determine the best offer, remembering that it may differ at the time of closing.