APR Vs. APOR: The Difference And What It Means For You And Your Clients
If you stick around the mortgage business long enough, you adapt to the lingo. When that happens, we tend to just sink into the alphabet soup. However, every once in a while, it doesn’t hurt to have a refresher, particularly when the policy behind the lingo can have a big impact on clients.
In this blog post, we’ll touch on the difference between APR and APOR and what it means for you and your clients.
Before we get to APOR, it’s important to note that the rate is in itself an annual percentage rate (APR). This means that it takes into account both the base interest rate and any applicable closing costs.
An average prime offer rate (APOR) is the average APR interest rate for low-risk loans that have similar points and terms. The APOR is gathered for a number of different loan terms for fixed and adjustable rate mortgages.
The survey of record for the purposes of determining APOR is the Freddie Mac Primary Mortgage Market Survey. This is released every Thursday, although that may move due to occasional bank holidays.
Why Does APOR Matter?
The reason that APOR is so closely tracked is that it’s the basis for federal as well as many state tests for higher-priced mortgages. When necessary, you can originate a higher-priced mortgage, but loan options may be limited in certain circumstances.
You should also be aware that there are extra requirements associated with these loans.
What Qualifies As A Higher-Priced Mortgage?
Different states have their own requirements, so we recommend checking local law on that front. However, we can go over the federal higher-priced mortgage test here.
At the federal level, a loan is a higher-priced mortgage if the interest rate is 1.5% higher than the average interest rate for similar terms on a primary mortgage. On a second lien, the mortgage is considered higher-priced if the lien is 3.5% higher than other comparable loans.
What’s Involved In Doing A Higher-Priced Mortgage Loan?
States have their own requirements regarding what qualifies as a high-cost mortgage loan. You may be limited in your ability to do loans in certain states if they run afoul of the state law regardless of whether they meet the federal test.
Secondly, you may have other requirements that apply. For example, higher-priced mortgage loans often need an escrow account associated with them. Some clients don’t like having to have an escrow account, so you may need to look for alternate loan options.
In a property flipping scenario that requires a second appraisal, the lender may need to cover that if the loan is considered high cost. You may also have to collect certain extra documentation in order to verify the client’s ability to repay the loan.
Ways To Avoid High-Cost Regulations
The easiest way to stop dealing with high-cost regulations is to lower the fees on the loan. Although this may require looking at some different financing options, it may result in a better experience for the client.
For more tips, resources and access to technology to take your business to the next level, reach out to your Account Executive or partner with Rocket ProSM TPO today!