Which expense is NOT factored into the calculation of the Annual Percentage Rate (APR)?

The Annual Percentage Rate (APR) is designed to give borrowers a more comprehensive understanding of the total cost of a mortgage over the loan term, taking into account not just the interest rate, but also certain fees that are involved in obtaining the loan.

The correct answer refers to the hazard insurance premium, which is an expense that does not typically get included in the APR calculation. The APR is primarily focused on costs that are directly associated with the financing of the mortgage, such as the interest, processing fees, origination fees, and mortgage insurance premiums, which provide a clearer picture of the cost to borrow.

Hazard insurance is a separate type of expense meant to protect the borrower’s property against damage and is not a cost incurred to obtain the loan itself. While it is a necessary expense for homeowners, it does not directly impact the costs related to capital or financing terms, which APR is meant to quantify. This distinction helps ensure borrowers understand the specific financial burden of the loan terms rather than standard and recurring costs associated with homeownership.

In contrast, the other fees listed—processing fees, origination fees, and mortgage insurance premiums—are directly tied to the loan process and are thus included in the APR calculation, as they affect the overall cost of