Through the Federal Truth in Lending Act, a mortgage lender is required to provide a consumer with the Annual Percentage Rate (APR) of a mortgage loan within three days after the consumer’s loan application has been received. As a general rule this Annual Percentage Rate is the cost of any lender or broker fees, including interest paid on those fees through the term of the mortgage loan, expressed as percentage and added to the effective interest rate (the offered interest rate). Unfortunately, not all lender or broker fees are required to be included in this adjustment, therefore creating a slightly misleading figure (I assume this is because many lenders and mortgage brokers have “creative” ways to charge exorbitant additional costs for trivial items which have not been required to be included… yet.). Also, third party fees such as those generated by title companies, appraisers, and inspectors, among others are not required to be calculated into the Annual Percentage Rate. Once these additional, non-required, costs are added to the loan, the actual interest rate received will often be higher than the one originally offered and required to be given through the Federal Truth in Lending Act. One sure-fire way to avoid any APR adjustments is to pay any additional fees in cash, unfortunately for many of us, this is not an option.

The Annual Percentage Rate of a mortgage loan is calculated as if the loan would continue to term. For this reason, using the APR is not an accurate determination of the interest rate for those individuals who plan to pay off their mortgage early. Early payoff of a mortgage can actually increase the offered APR of a loan due to the fees added to the mortgage being paid over a shorter period of time. Depending on the amount of fees added to a mortgage, the savings received on the interest paid on these additional charges over the term of the loan may be negligible if the loan is paid off early. Individuals who plan to pay off their mortgage before term should not use the offered APR for loan evaluation. They can, however, ask their lender or mortgage broker to recalculate the APR based on an assumption of how long the mortgage will be kept before payoff or use the following Interest Cost Calculators, to determine the actual interest rate of a mortgage paid off before term. Head to the bottom of the Calculator page, and make a selection from the options found under the “Calculating APR” section.

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