Mortgage Loan Calculator: Lender Fees From APR
October 25, 1999, Revised January 7, 2008
Aside from the interest rate, the single most important piece of information to a borrower is total upfront lender fees, which is not a required disclosure. Borrowers can calculate it for themselves using a calculator, if they know the APR.
"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?"
Your question points up one of the critical failures of mandatory disclosure rules in the home loan market. Borrowers are overwhelmed with information they often don't understand, such as the Annual Percentage Rate (APR), and critically important information that they would understand is nowhere to be found.
Aside from the interest rate, the single most important piece of information to a borrower is the total upfront credit charge -- the total that the borrower must pay the lender and mortgage broker for the loan. Yet lenders are not required to disclose it in either the Truth in Lending Statement (TIL) mandated by the Federal Reserve, nor the Good
Why is this? The Federal Reserve requires lenders to report the APR, which is a comprehensive measure of credit cost that takes account of the rate and most upfront credit charges. No doubt the Fed reasoned that since the borrower knew the APR, the figure for total credit charges that is used in calculating the APR was redundant. But it is not redundant, because many borrowers who would understand the figure for credit charges 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. The APR assumes the borrower will be in the house for the entire term of the loan, which most are not. Borrowers who don't expect to have their mortgage for 10 years or more can easily be led astray by the APR. See Questions About the Annual Percentage Rate.
If your time horizon is shorter than 10 years, it is more useful to know the credit charges used to calculate the APR than to know the APR itself. Using the calculator 10a, Estimating Lender Fees From the APR on Fixed-Rate Mortgages, you can convert the one into the other. This calculator works backwards from the interest rate, points and APR on fixed-rate mortgages (FRMs) 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 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.
The fees derived from the calculator using APRs shown in the media do not include all settlement costs. Mortgage insurance is not included in the APR until a borrower has been identified who requires it. Settlement costs that are not viewed as part of the cost of credit also are not included. These items include 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.
Aside from the interest rate, the single most important piece of information to a borrower is total upfront lender fees, which is not a required disclosure. Borrowers can calculate it for themselves using a calculator, if they know the APR.
"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?"
Total Lender Fees Are Not a Required Disclosure
Your question points up one of the critical failures of mandatory disclosure rules in the home loan market. Borrowers are overwhelmed with information they often don't understand, such as the Annual Percentage Rate (APR), and critically important information that they would understand is nowhere to be found.
Aside from the interest rate, the single most important piece of information to a borrower is the total upfront credit charge -- the total that the borrower must pay the lender and mortgage broker for the loan. Yet lenders are not required to disclose it in either the Truth in Lending Statement (TIL) mandated by the Federal Reserve, nor the Good
Faith Estimate of Settlement (GFE) required by HUD.
Why is this? The Federal Reserve requires lenders to report the APR, which is a comprehensive measure of credit cost that takes account of the rate and most upfront credit charges. No doubt the Fed reasoned that since the borrower knew the APR, the figure for total credit charges that is used in calculating the APR was redundant. But it is not redundant, because many borrowers who would understand the figure for credit charges 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. The APR assumes the borrower will be in the house for the entire term of the loan, which most are not. Borrowers who don't expect to have their mortgage for 10 years or more can easily be led astray by the APR. See Questions About the Annual Percentage Rate.
Calculating Total Lender Fees From the APR
If your time horizon is shorter than 10 years, it is more useful to know the credit charges used to calculate the APR than to know the APR itself. Using the calculator 10a, Estimating Lender Fees From the APR on Fixed-Rate Mortgages, you can convert the one into the other. This calculator works backwards from the interest rate, points and APR on fixed-rate mortgages (FRMs) 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 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.
Limitations
The fees derived from the calculator using APRs shown in the media do not include all settlement costs. Mortgage insurance is not included in the APR until a borrower has been identified who requires it. Settlement costs that are not viewed as part of the cost of credit also are not included. These items include 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.