Calculating Fees Hidden in a Mortgage
This calculator can be used to figure out the total of all costs in a mortgage charged to the borrower by a lender. The calculator needs a total of four inputs, including:
- The total home loan value, which is the amount of money borrowed from the lender
- The Annual Percentage Rate, or APR, of the loan as quoted by the lender
- The actual rate of interest charged on the loan, which will be equal to, or lower than, the loan’s APR
- The term of the year, which is the length of time over which the mortgage is repaid, stated in years
The calculator then provides the user with a total of two outputs:
- An estimate of the monthly mortgage payment
- The total cost of the loan, as indicated by the loan’s annual percentage rate
Interest Rates versus Annual Percentage Rate (APR)
When evaluating loans, borrowers often mistakenly think the lender’s published annual percentage rate, or APR, is the rate of interest charged on the loan. These two different values are related to each other, but they serve different purposes. The interest rate charged on a loan, also known as the finance charge, is the cost to borrow money. Until the money owed the lender, or principle of the loan, is repaid the borrower pays a finance charge to the lender that is based on the loan’s interest rate. For example, the loan’s interest rate is used to calculate the borrower’s monthly payment, not the annual percentage rate.
Lenders in the United States are required to quote both the interest rate on the loan as well as its APR. That’s because loans, and especially mortgages, can involve some features that make comparing offers from the same lender, or between lenders, difficult for a borrower. The APR value “normalizes” various fees lenders charge such as points (upfront payment of the loan’s interest charges) or loan origination fees. Since the calculation of a loan’s APR takes into consideration all the costs associated with a loan, this value can be used to make a fair comparison between offers from lenders. This leaves us with one simple rule of thumb when it comes to comparing APRs:
The mortgage with the lowest APR is the lowest cost option; it provides the borrower with the best “deal”
Keep in mind the best deal for the borrower might not mean the lowest monthly payment. But the lower APR loan will have the lowest total out-of-pocket costs.
Interpreting the Results of this Calculator
Our calculator “reverse engineers” APR to reveal the total fees associated with a loan. By comparing the interest rate on the loan to the loan’s APR, can calculate both the loan’s monthly payment (which is based on the interest rate), and the total cost of the loan. If a loan’s APR is exactly equal to the loan’s interest rate, then the Total Cost value presented by our calculator would be zero. Assuming there is a difference between a loan’s interest rate and APR, the Total Cost value will also increase as the term of the loan increases. Total Cost will also increase as the loan’s value, or amount of money borrowed, increases.