How to Calculate the Finance Charge on a Mortgage Loan?

How to Calculate the Finance Charge on a Mortgage Loan?

The finance charge is the total amount of interest and loan payments you will have to pay over the life of the mortgage. However, sometimes in the initial stages of choosing a lending institution, it can be difficult to find out the exact amount of finance charge and compare these costs because they are somehow hidden from the potential borrower.

Annual Percentage Rate for Mortgages

The first thing to remember is that the Annual Percentage Rate (APR) you will see when calculating your loan is always different from the loan rate. The APR is the total cost of the mortgage, which includes interest, mortgage origination fees, and other related fees paid over the life of the loan. Lending institutions use the formula below to calculate the annual percentage rate:                                                                                                                                                                 
When you receive your mortgage calculation from the lending institution, you should look on page 3 of the Loan Estimate (see example). This will show the annual interest rate on your loan. You will see that the annual percentage rate is slightly higher than the mortgage rate. This is because the annual interest rate includes financial charges like origination charges, discount points, mortgage insurance, and other applicable lender charges.

You will also see the amount of interest you will pay over the life of the loan. If you are interested in ways to get a lower interest rate loan and you have already applied, you can check with a mortgage counselor about your buy-down options.

Finance Charge Amount Calculation

If you have the time, you can calculate the financial cost of your mortgage yourself by multiplying the number of payments you will make by the amount of your monthly payment. Then subtract the loan principal. Or, use the alternative formula:

Finance charge = Balance Subject to Finance Charge × Periodic rate × Number of Periods

Or you can simply find your finance charge on page 5 of the Closing Disclosure form in the “Loan Calculations” section (see example).

Should you need help or have any questions please contact LBC Mortgage experts to get advice!

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