What is APR?

APR is a yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans. In mortgages, it is the interest rate of a mortgage when taking into account the interest, mortgage insurance, and certain closing costs including points paid at closing

Most any major Lender or Broker uses origination software to produce your loan documents. After all the information about your loan has been included, the APR or Annual Percentage Rate is calculated automatically to be printed on your Truth in Lending statement, which must be provided to you in the disclosure documents.

As we mentioned previously, APR is a way for you to compare "apples to apples" to see how any individual offer stacks up against a competing offer by taking into account not only your rate, but fees as well. It's a great tool when used effectively, however there is a way the APR can be falsely manipulated.


What to look out for ?

One of the features of the origination software that directly affects your APR is what's called a POC, or Paid Outside of Closing. Every line item on your Good Faith Estimate has the option of being checked POC, so the final calculation of your fees reflects the fee you paid, but is not charged to you again at closing.

A great example of this is your appraisal. Most often, the appraisal is a separate transaction paid directly to the appraiser and is typically paid before the loan is closed. That needs to be noted in the GFE. But since the money has already been paid and will not be financed, it is not reflected in your APR.

Obviously, the ability to freely check the POC box opens up a window of opportunity for unscrupulous companies to falsely disclose an inaccurate APR to make their offer more appealing. If a great number of fees are rightfully being financed, but have been checked off as POC, your APR will be inaccurate.

This is not to say that other fees, particularly in a purchase situation, will not be paid outside of closing. But in order to do an accurate comparison, make sure you take into account what you intend to pay and what you intend to finance and that all offers contain the same amount of both.