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Annual Percentage Rate Calculator |
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What is an Annual Percentage Rate
(APR)? |
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The annual percentage rate (APR) is an
interest rate that is different from the note rate. It
is commonly used to compare loan programs from different
lenders. The Federal Truth in Lending law requires
mortgage companies to disclose the APR when they advertise a
rate. Typically the APR is found next to the rate. |
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| Example: |
30-Year Fixed |
8% |
1-Point |
8.107% |
APR |
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The APR does NOT affect your monthly
payments. Your monthly payments are a function of the
interest rate and the length of the loan.
The APR is a very confusing number. Even mortgage
bankers and brokers admit it is confusing. The APR is
designed to measure the "true cost of a loan." It
creates a level playing field for lenders. It prevents
lenders from advertising a low rate and hiding fees.
If life were easy, all you would have to do is compare APRs
from the lenders/brokers you are working with, then pick the
easiest one and you would have the right loan. Right?
Wrong.
Unfortunately, different lenders calculate APRs differently.
So a loan with a lower APR is not necessarily a better rate.
The best way to compare loans is to ask lenders to provide
you with a good-faith estimate of their costs on the same
type of program (e.g. 30-year fixed) at the same interest
rate. Then delete all fees that are independent of the
loan such as homeowners insurance, title fees, escrow fees,
attorney fees, etc. Now add up all the loan fees.
The lender that has lower loan fees has a cheaper loan than
the lender with higher loan fees. |
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The reason why APRs are confusing is
because the rules to compute APR are not clearly defined. |
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What fees are included in the APR?
The following fees ARE generally included in the APR:
Points, both discount points and origination points.
Pre-paid interest. The interest paid per diem from the date the
loan closes to the end of the month. The per diem
interest is calculated as follows: (initial principal loan
balance * interest rate)/364. Most mortgage
companies assume 15 days of interest in their calculations.
However, companies may use any number between 1 and 30.
Loan-processing fee.
Underwriting fee.
Document-preparation fee.
Private mortgage-insurance. |
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The following fees are SOMETIMES included
in the APR:
Loan-application fee.
Credit life insurance (insurance that pays off the mortgage
in the event of a borrowers death). |
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The following fees are normally NOT
included in the APR:
Title or abstract fee.
Escrow fee.
Attorney fee.
Notary fee.
Document preparation (charged by the closing agent).
Home-inspection fees.
Recording fee.
Transfer taxes.
Credit report.
Appraisal fee. |
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An APR does not tell you how long your
rate is locked for. A lender who offers you a 10-day
rate lock may have a lower APR than a lender who offers you
a 60-day rate lock.
Calculating APRs on adjustable and balloon loans is even
more complex because future rates are unknown. The
result is even more confusion about how lenders calculate
APRs.
Do not attempt to compare a 30-year loan with a 15-year loan
using their respective APRs. A 15-year loan may have a
lower interest rate, but could have a higher APR, since the
loan fees are amortized over a shorter period of time. |
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Finally, many lenders do not even know
what they include in their APR because they use software
programs to compute their APRs. It is quite possible
that the same lender with the same fees using two different
software programs may arrive at two different APRs. |
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Conclusion. |
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Use the APR as a starting point to
compare loans. The APR is a result of a complex calculation
and not clearly defined. There is no substitute to
getting a good-faith estimate from each lender to compare
costs. Remember to exclude those costs that are independent
of the loan. |
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BancGROUPTM Mortgage
Corporation is an Equal Housing Lender and California, Colorado (MB100017881), Illinois, Indiana,
Wisconsin and Florida Residential Mortgage Licensee