Aside from the interest rate, the single most important piece of information to a borrower is the total upfront credit charge, which is not a required disclosure. Borrowers can calculate it for themselves using a calculator, if they know the APR.

Mortgage Loan Calculator: Lender Fees From APR
October 25, 1999, Revised January 7, 2008, September 2, 2010, Reviewed February 5, 2011

Aside from the interest rate, the single most important piece of information to a mortgage borrower is total lender fees. These consist of points, which are expressed as a percent of the loan amount, and fixed-dollar charges which are not related to loan size. Until January 1, 2010, when a new Good Faith Estimate (GFE) became effective, total lender fees was not a required disclosure. It is now shown on the GFE, but borrowers aren't given a GFE until they have submitted a loan application. (See The New GFE Will Help Borrowers). But borrowers who are mortgage shopping are as much at sea as they were before, as illustrated by this letter.

"In trying to compare mortgage prices of different lenders, I understand that I have to look at the fees as well as the points that lenders charge, but ads in the newspaper only show rate, points and APR... Why aren't lenders required to show all their fees in their ads rather than just the points?"

Why Mortgage Lenders Are Not Required to Show Lender Fees in Their Ads


Great question. My surmise is that the Federal Reserve, which has a Truth in Lending rule that all ads that include an interest rate must also show an APR, decided that borrowers didn't need to know total lender fees because they knew the APR. Since the borrower knew the APR, the figure for total lender fees that is used in calculating the APR was redundant. But it is not redundant, because many borrowers who would understand what total lender fees mean do not understand the APR, and are therefore reluctant to use it.

Furthermore, there is good reason for borrowers to be leery of the APR, even if they do understand it. If their time horizon is shorter than 7 years, if they are looking to raise cash in a refinance, or if they are shopping for a no-cost loan or a HELOC,  it is more useful to know the total lender fees used to calculate the APR than to know the APR itself. See Questions About the Annual Percentage Rate.

Calculating Total Lender Fees From the APR


But borrowers shopping for an FRM who know the interest rate, points and APR, can derive total lender fees using my calculator 10a, Estimating Lender Fees From the APR on Fixed-Rate Mortgages. This calculator works backwards from the interest rate, points and APR  to derive the other upfront fees that were used by the lender to calculate the APR.

Here is an illustration of how it works. My local newspaper on September 20, 1999 quoted one lender as offering a 30-year FRM at 7.75% and 1 point, with an APR of 8.66%. Using a $100,000 loan amount, I entered these 4 items in the calculator, clicked on the "compute" button, and it told me that lender fees other than points amounted to $7180. Note that APRs shown in the media assume a loan amount of $100,000 unless the loan is designated "jumbo", in which case the assumed loan amount is $250,000.

Warning: APRs Are Not Always Calculated Correctly


The fees derived from the calculator using APRs shown in the media include only lender fees, not charges of third parties. Mortgage insurance is included in the APR but not until a borrower has been identified who requires it, so it will not be included in the APR shown in the media. Other settlement costs that are not included are settlement/closing fees, abstract/ title search/title examination/title insurance costs, recording/filing fees, and city/county/state taxes.

The APR calculator assumes that lenders have properly identified all the charges that should be included in the APR, and have calculated the APR correctly. There is a lot of anecdotal evidence to suggest that these assumptions are not always correct. Since mistakes will usually be in the direction of understating the APR, the user should place more credence in high charges (such as the one cited above) than in low ones.
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