California Real Estate Practice Exam

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A lender charges a loan origination fee of one point on a mortgage loan. This fee has what effect on the nominal interest rate relative to the APR?

The nominal rate is lower than the APR
The nominal rate will be the same as the APR
The nominal rate is higher than the APR
The APR does not include the origination fee

The correct answer is: The nominal rate will be the same as the APR

The nominal interest rate is the rate that is stated before accounting for any fees or compounding. The APR (annual percentage rate) is the rate that includes all fees and reflects the total cost of borrowing money. Since the loan origination fee is included in the APR, the nominal rate and the APR will be the same in this case. Option A is incorrect because the APR is always higher than the nominal rate, regardless of any fees. Option C is incorrect because the APR, not the nominal rate, reflects the total cost of borrowing. Option D is incorrect because, as mentioned before, the APR includes all fees, including the loan origination fee. Therefore, the correct answer is B, as the nominal rate and the APR will be the same when a loan origination fee of one point is charged.