APR Often Misleads Borrowers into Costlier Mortgage Loans

APR is not calculated on the mortgage amount, but rather on the amount financed, which is derived from the Truth in Lending statement. Because the amount financed takes into account lender fees, like application fees, points and commitment fees, as well as interim and per diem interest, it gives lenders variables that they can use to raise or lower the final APR value.

The amount financed is equal to the mortgage amount less any lender fees, points and interim interest, so the more fees, the lower the amount financed. Monthly payments are then calculated as a product of the amount financed to give you the APR. The lower the amount financed, the higher the APR. Therefore, lenders can easily manipulate the amount financed by assuming a closing on the last day instead of the first day of the month, which would increase the amount financed and decrease the APR.

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