APR Explained

by Cautious Consumer
(Missouri, USA)

APR Explained - What is the difference between the locked mortgage rate and effective APR: Hi Kate, I have a real estate sales contract due to close on October 26. Three days ago, I locked in my rate over the phone with the lender.


The rate lock fee was paid with a credit card. On the same day that the rate was locked in, the lender overnighted to me all materials requiring my review and signature, including a written but unsigned rate lock agreement.

Now for the problem: My rate was locked in at 4.875% on a FHA 30 year fixed rate loan. However, the Truth-in-Lending Disclosure Statement forwarded by the lender lists the annual percentage rate as 5.431%. While I know the actual effective A.P.R. takes into account fees that the lender must report to the government, a .556% increase seems excessive. Should I be leery of this lender, or am I simply overreacting?

Also, are you aware of any particular steps I will need to take should I decide request a refund of my rate lock fee?

Thanks in advance for your insight. Cautious Consumer

Kate Answers: APR Explained - What is the difference between the locked mortgage rate and effective APR?

Hi Cautious Consumer, While I won't declare APR useless, I will say it has its shortcomings. Let me explain.

APR explained: APR stands for Annual Percentage Rate. The formula was intended to help consumers compare mortgage rates and fees. Sounds like a good plan except lenders interpret the method for formulating APR differently. I'm not sure I ever saw two mortgage institutions implement the formula identically.

So while you need to pay attention to the Truth in Lending Disclosure which discloses the APR, the best solution for mortgage borrowers is to become savvy at interpreting a Good Faith Estimate. It may sound difficult but I know how to simplify this for you.

To this end, I'm sending you to another page of my website, where you will find Understanding Mortgage Closing Costs to walk you, step by step, through a Good Faith Estimate. You are about to lasso comparing mortgage closing costs once and for all!

As to your second question, whatever requests you make regarding a refund of a rate lock fee, follow up by putting the conversation in writing. Sounds simple? It is. But simple can save you a lot of time, money and headache!

In the meanwhile, I recommend looking over the links at the bottom of the page. They lead to further information on this website, crucial to locking interest rates.

Take a moment to bookmark APR Explained: What is the difference between the locked mortgage rate and effective APR? to your favorites so can easily return in the future.

Cautious Consumer, please come back and visit often. Help me spread the word by sharing my website with your friends. Remember, all of my information is free!

Best Wishes,


P.S. Go to my Best Mortgage Rate Blog, an entertaining source of mortgage information. Subscribe now to the RSS feed.

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