A mortgage of $400,000 has a contract interest rate of 5.50% compounded semi-annually. There is a $1,000 appraisal fee and a $500 legal fee included in the total cost. If the payments are monthly over a 25-year amortization, which of the following statements about the APR is true?

Question: A mortgage of $400,000 has a contract interest rate of 5.50% compounded semi-annually. There is a $1,000 appraisal fee and a $500 legal fee included in the total cost. If the payments are monthly over a 25-year amortization, which of the following statements about the APR is true?

Answer options:

• The APR is exactly 5.50%.
• The APR will be slightly lower than 5.50% because of the fees. ✅ The APR will be higher than 5.50% because of the fees.
• The APR cannot be calculated without the monthly payment amount.

Correct answer: The APR will be higher than 5.50% because of the fees.

Explanation: The Annual Percentage Rate (APR) reflects the true cost of borrowing, including additional fees such as appraisal and legal fees, spread over the life of the loan. Since these fees are added costs, they effectively increase the overall cost of borrowing, making the APR higher than the nominal contract rate.