Settlement Costs Included in Annual Percentage Rate (APR)

July 11, 2002, Revised December 4, 2004, January 7, 2008, Revised April 9, 2011

In principle, the mortgage 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 Yes
Lender's attorney fee Yes Yes
Settlement or closing fee Yes 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 Yes 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. 

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