Federal law requires lenders to disclose the annual percentage rate to their customers before they start the application for a home loan. The annual percentage rate, or APR, can be confusing because of the fact that different lenders offer their own terms. Various fees that come with the purchase of a home are also rolled into the mortgage and inflate mortgage interest rates slightly, so there are two interest rates, the nominal and effective. However, the purpose of requiring disclosure of the APR is to give the consumer the option to shop around for better mortgage rates. This fact benefits the consumer so they can make the best decision for their situation at the time of purchasing a home. One loan may offer easier terms at a slightly higher interest rate as opposed to one that has a lower rate but stricter terms.





Calculating nominal percentage rate is easy. It is the amount of interest charged monthly, multiplied by the 12 months of the year. For example: A lender is offering annual mortgage rates of 6 percent. Divide the number by 12 and the monthly interest rate is .5 percent. The math on a 30-year loan is done at its creation in order to determine a set monthly payment. The payments may go down as the loan ages and the principal balance decreases. The lower the principal, the less interest charged. This is a simplified interpretation of how the annual percentage rate is calculated. Fees and other charges are rolled into the mortgage, creating the effective percentage rate.





Home loans are more than just the purchase amount and mortgage interest rates. Fees are included as all who are involved in originating the loan are there to get their slice of the pie. These fees are: loan origination fees, interest discount points, appraisal fees, title searches and insurance, land surveys, taxes, deed recording costs and a charge to pull your credit report. These fees tend to run the buyer several thousand dollars, and are usually added into the principal balance. The lender and other parties typically recoup their costs within the first few mortgage payments, which means that the buyer won't see any monies applied to the principal for some time.





All of these fees can be rolled into the interest rate or treated as a short-term loan which is paid off first. For example, if the fees total $5,000 and the monthly mortgage payments are $1,250, the first four months of payments go towards paying off the fees. After the loan is cleared, the money starts going towards actual mortgage.





How the borrower chooses to pay for the fees is purely up to them. A borrower needs to determine how long they intend to stay in the home for in order to make the most cost-effective decision. A long or short stay is going to have different financial consequences and it never makes sense to overpay to the bank.