Mortgage Loan Originator (MLO) Licensing Practice Test 2026 – Your All-in-One Guide to Exam Success!

The correct answer focuses on processing fees as a key component of the calculation of the Annual Percentage Rate (APR). The APR is designed to give borrowers a more comprehensive understanding of the total cost of borrowing, including not just the interest rate but also certain additional costs associated with obtaining the loan. This ensures that borrowers can make informed comparisons between different loan offers.

Processing fees are included in the APR because they are considered part of the finance charges that a borrower must incur in order to obtain the loan. These are costs associated with the administration of the loan and typically include things like application processing, underwriting, and similar fees.

While insurance, title fees, and appraisal fees may be necessary components of the home buying process or associated with securing a mortgage, they usually do not fall under the finance charges that are included in the APR calculation. Insurance can vary widely by state and policy, title fees are typically considered closing costs, and appraisal fees, while important, are also generally classified as part of the closing costs rather than finance charges impacting the APR.

Understanding how APR is calculated helps potential borrowers assess the true cost of their loans over time, making it a vital concept in the mortgage process.