Which cost is included in the APR calculation on the closing disclosure forms?

The Annual Percentage Rate (APR) is a measure that reflects the total cost of borrowing, expressed as a yearly rate. It includes the interest rate along with certain costs associated with obtaining the loan, allowing borrowers to understand the true cost of a mortgage over time.

In the context of the options provided, mortgage insurance is included in the APR calculation on the closing disclosure forms. This is significant because mortgage insurance, which protects the lender in case of default by the borrower, is a recurring cost that can affect the borrower’s overall financial commitment to the loan. Including this cost in the APR gives borrowers a more comprehensive view of what their loan will cost them over its duration.

Other costs listed do not contribute to the APR calculation. Escrow deposits are not factored in because they are not fees charged for borrowing but rather are payments set aside to cover property taxes and insurance. A down payment is an initial upfront cost and not a fee associated with the loan itself, so it also does not enter into the APR calculation. Lastly, a pest inspection fee is considered a one-time charge and is not included in the APR since it doesn’t reflect the cost of borrowing over the loan's term.

Understanding what is included in the APR is crucial for borrowers as it helps