Settlement Costs Included in Annual Percentage Rate

July 11, 2002, Revised December 4, 2004 In principle, the APR should include all settlement costs that would not arise in an all-cash transaction.  Unfortunately, the current definition violates this rule in a number of instances, with no rhyme or reason.  The columns below compare the treatment of various charges under the current APR rules, and as it would be under the principle stated above.  A "yes" means the charge is included, a "no" means it isn't included, and a "?" indicates that treatment is not clear or depends on the circumstances. Type of Charge Current Proper Loan origination fee Yes Yes Loan discount, "points" Yes Yes Mortgage broker fee Yes Yes Tax/flood service (life of loan) Yes Yes Assumption fee Yes Yes Required credit life or disability insurance Yes Yes Mortgage insurance premiums Yes Yes Lock/commitment fee Yes Yes Application fee ? Yes Lender's attorney fee ? Yes Settlement or closing fee ? Yes Credit report No Yes Appraisal/survey No Yes Lender's inspection fee No Yes Pest inspection No Yes Tax/flood certification No Yes Loan document preparation No Yes Abstract or title search/title examination No Yes Title insurance, lender coverage No Yes Notary fee (for mortgage) No Yes Recording fee for mortgage No Yes Deed preparation, real estate commission, transfer tax, hazard insurance, escrows, borrower coverage on title insurance, tax stamps (state, city, county)* No No Per diem interest** Yes No Source: Adapted from Joint Report to the Congress on Consumer Disclosures Under TILA and RESPA, Federal Reserve Board and Department of Housing and Urban Development, July, 1998, Appendix C. *These charges all arise in a cash transaction except for escrows, which should not be included because they remain the property of the borrower. **Per diem interest should not be included because it is not known until the closing date is finalized, and it complicates the calculation of the APR without affecting it materially. Copyright Jack Guttentag 2004

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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