Good Faith Estimates and
Annual Percentage Rate

  • The California Mortgage Loan Disclosure Statement (Good Faith Estimate) is a special two page form used by a lender to calculate closing costs and loan fees associated with a real estate financing request.
  • A lender is required by the federal Real Estate Settlement Procedures Act (RESPA) to provide a prospective home buyer with a Good Faith Estimate of the fees due at closing within three days of applying for a loan.
  • These mortgage fees, also called settlement costs, cover every expense associated with your home loan: inspections, title insurance, taxes and other charges. An accurate Good Faith Estimate is essential for a prospective home buyer to make a informed decision about the exact settlement costs.

What Is An Annual Percentage Rate (APR)?

  • Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. Get a Good Faith Estimate to compare costs. Exclude those costs that are independent of the loan.

  • The annual percentage rate (APR) is an interest rate that is different from the note rate. It is used to compare loan programs from different lenders.

  • The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.  For example:  30 year fixed rate 6.0%   1 point fee  6.107% APR

  • An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!

  • The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.

  • The APR is a very confusing number. The reason why APRs are confusing is because the rules to compute APR are not clearly defined.

  • The APR is designed to measure the “true cost of a loan.” It creates a level playing field for Lenders. It prevents lenders from advertising a low rate and hiding fees.

  • Calculating APR’s on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APR’s. Do not try to compare a 30-year loan with a 7-year loan using their respective APR’s. A 7-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.

What Fees Are Included in the APR?

  • These fees ARE included in the APR:
    • Points – both discount points and origination points

    • Pre-Paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!

    • Loan Processing Fee

    • Underwriting Fee

    • Document Preparation Fee

    • Private Mortgage Insurance. 

  • Theses are SOMETIMES included in the APR:

    • Loan Application Fee when charged on the loan application.

    • Credit Life Insurance which insurance that pays off the mortgage in the event of a borrowers death. 

  • The following fees are normally NOT included in the APR:

    • Credit Report

    • Appraisal Fee

    • Title or abstract fee

    • Escrow fee

    • Attorney fee

    • Notary fee

    • Document Preparation (charged by the closing agent)

    • Home Inspection Fees

    • Recording Fee

    • Transfer Taxes