Annual Percentage Rate (APR)
In comparing any type of loan, whether it be a fixed rate loan
to a fixed rate loan, adjustable rate loan to adjustable
rate loan or fixed rate loan to adjustable rate loan, there
is one way that can be used to compare apples to apples and
even apples to oranges.
APRs are designed to do just that. APRs are a way to calculate
the annual cost of loans, taking into consideration loan origination
fees (points) and the other costs associated with securing
a loan. The additional costs include appraisal and credit report
fees as well as processing and document fees.
One confusing aspect of APRs is that the APR on 15 year loans
will carry a higher relative rate due to the fact that the
points are amortized over the 15 year term rather than the
30 year term. When a Regulation Z (Reg Z, the mortgage companies
disclosure of cost for the loan) is prepared for a buyer/borrower
the prepaid interest is also included in the APR calculation.
For our illustrations we will use only the points, appraisal,
credit report, processing and document fees.
As a means of protecting consumers from companies who did
not disclose the fees associated with a particularly low start
rate on an adjustable rate loan or below market rate on a fixed
rate loan, APRs give consumers a way to check the true cost
of a loan.
One common situation that occurs when a borrower receives
a Reg Z, and a copy of their note, is the column that indicates
the amount financed is less than the loan amount the borrower
is actually financing. It is here that many borrowers leap
before they look and call to find out why they are only receiving
a $146,925 loan when they applied for a $150,000 loan. It is
here that APRs enter the picture.
Let's look at how APRs are calculated. For our illustration
we will assume a 8.50% fixed rate interest. For a 30 year loan
the monthly payments for a $150,000 loan are $1,153.37.
In order to calculate the APR for this loan we subtract $2,250.00
(1.50 points), $275.00 appraisal fee, $50.00 credit report
fee, $500.00 processing, document and other fees. ($150,000
- $3,0750 = $146,925). The $146,925 is then used as the present
value/loan amount to determine the true cost of this loan.
By solving for the new interest rate for a $146,925 loan with
the same payment of $1,153.37, the APR is calculated as 8.73%.
How does this compare to a 30 year fixed rate loan with a
8.00% interest rate and 3.50 points? The monthly payments for
this loan is $1,100.65.
In order to calculate the APR for this loan we subtract $5,255.00
(3.50 points), $275.00 appraisal fee, $50.00 credit report
fee, $500.00 processing, document and other fees. ($150,000
- $6,075 = $143,925). The $143,925 is then used as the present
value/loan amount to determine the true cost of this loan.
By solving for the new interest rate for a $143,925 loan with
the payment of $1,100.65 the APR is calculated as 8.44%.
Apply today to
let Bancplus Home Mortgage Center help you get the great
financing you want
and deserve!
