Two correctly calculated quotes for the same $300,000 closed-end fixed-rate loan have identical 6.25% note rates, terms, payment schedules and recurring charges. Only upfront charges included in APR differ. One APR is 6.31% and the other 6.58%. What does the difference indicate?
Correct Answer
C) The 6.58% lender is charging more in finance charges at the front
C. The 6.58% APR quote has higher included upfront finance charges on these assumptions. APR reflects more than the note rate, including applicable points and other financing costs. The question holds the other inputs constant, so the different upfront finance charges explain the difference. Scope and exceptions: APR does not include every cash-to-close item or tell which offer best fits a short holding period. Without the stated assumptions, a higher APR does not identify upfront fees alone. Do not subtract APRs and multiply by principal to estimate the upfront dollar difference. Source: Mortgage APR and comparison cautions — https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-mortgage-interest-rate-and-an-apr-en-135/
Why This Is the Correct Answer
C. The 6.58% APR quote has higher included upfront finance charges on these assumptions. APR reflects more than the note rate, including applicable points and other financing costs. The question holds the other inputs constant, so the different upfront finance charges explain the difference. Scope and exceptions: APR does not include every cash-to-close item or tell which offer best fits a short holding period. Without the stated assumptions, a higher APR does not identify upfront fees alone. Do not subtract APRs and multiply by principal to estimate the upfront dollar difference.
Why the Other Options Are Wrong
Option A: The 2 quotes are identical, since the note rate decides the cost
Equal note rates do not imply equal included costs.
Option B: The 6.31% lender must be charging a prepayment penalty instead
The quoted APR difference does not establish a prepayment penalty.
Option D: The 6.58% lender has a higher note rate hidden in a later adjustment
The stated fixed rates and identical terms exclude that explanation.
Exam Tip
Compare APR alongside itemized costs and matching loan terms.
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