Consumers who are fully aware that their interest rate and Annual Percentage Rate (APR) are different are already ahead of the game. Most think they are interchangeable. Another fact that most don’t realize is that rate locks do not apply to both interest rate and APR. Interest rates change just about every day. Lately they have been on the rise which has caused some concern. For anyone who is purchasing right now they submit an application once they have secured a property to buy. It is often assumed that when the interest rate is locked, so is the APR.
APR is calculated using the interest rate but the variable items that determine APR (lender fees, origination and discount points) can still change. When you are approved for a loan, a Good Faith Estimate is generated but it is not final. There may be changes to it and fees may change or be added. If that is the case, any qualifying lender fee can be changed. Once that change takes effect, the new fee is subtracted from the total loan amount, which will typically then drive up you’re APR. Why would lenders take advantage of the ability to do this?
There has been no requirement for APR to be locked in that there is no regulation stating that the lender fees cannot change once the interest rate is locked. Because of the third party fees that have yet to be determined way after the interest rate is locked, that will never be required. This makes things convenient for the lender who can drive the APR up in case those fees change. Since the APR is the true interest amount you will pay over the life of the loan it could be a strong factor in determining who your lender will be.
As you are making applications for mortgage loans make sure to get a Good Faith Estimate as soon as they have gotten all of your information. Keep it handy and ask for another one prior to closing after third party closing costs have been identified. This will help assess whether your lender is taking advantage of the opportunity to not lock your APR.