What Is APR and Why Should You Care? PDF Print E-mail
APR Annual Percentage Rate ExplainedThe Annual Percentage Rate or APR is required by the Federal Truth in Lending Law in an effort to present borrowers with an accurate depiction of the cost of a loan. It is designed to aid consumers in their selection of a loan when comparing the various types and terms that are offered by lenders.

In essence, the annual percentage rate should reflect the actual cost of obtaining a loan on an annual or yearly basis. It expresses the relationship between the amount of money that is borrowed and the cost of obtaining this sum of money as a loan. The APR includes many of the fees associated with the loan.

If a bank lends you $10,000  and charges a $500 fee, you will actually receive $9,500, however you must still repay $10,000.  APR is the real yield and your real cost on this loan. 

Lets take it a step further to explain the example. We agreed that you will repay the loan at 8% interest on the $10,000, however you really only received $9,500.  Therefore the lender will earn more than the 8.0% interest rate on $10,000.  In this case, the yield (APR) is 9.799% based on the $9,500 you actually received.  

Truth In Lending - Cost of LoansAPR is the lender's yield on dollars actually lent ($10,000 minus $500 = $9,500).  In this case, the lender's yield (APR) on $9,500 is 9.799%.  The $9,500 also represents the Amount Financed in the Truth In Lending (TIL) disclosure.

For mortgage lenders, fees that must be subtracted from a mortgage loan to properly calculate Amount Financed for APR are:

  • Origination and Discount Points
  • Processing and Lender Fees
  • Pre-Paid Interest (Use 15 days when closing date is unknown)
  • Monthly Mortgage Insurance must be added to the payment of all FHA loans and Conventional loans greater than 80% loan to value.
  • The inclusion of MIP accounts for the large spread between Rate and APR on loans with mortgage insurance.

Fees NOT included in the APR calculation are third party fees such as appraisal and credit.

APR Predators

Many sophisticated borrowers shop interest rates by searching for lowest APR which, if property stated, is the real cost of borrowing.  Unfortunately, APR is not always stated properly.

How is advertised APR is misstated?

  • Prepaid Interest is not included - most common deception and true on most online rate sites as of this writing.
  • Prepaid Interest is understated - must be 15 days when closing date is unknown.
  • MI or MIP is not included in the APR.
  • Some lenders do not include MI or MIP on their web sites.
  • Lender fees are either understated or not included in the APR calculation. 
Note:
  • There is no such thing as a Zero Cost loan and some states prohibit lenders from advertising Zero Cost Loans.
  • The spread between Rate and APR on loans greater than 90% LTV should be at least 0.700%.  When it is not, the APR is being misstated.

The APR was designed to allow consumers to shop, comparing apples to apples and knowing what the actual cost of a loan is becuase the APR is reflective of the fees.  This is not the case for most online quotes to be wary of  these operations!

William Art Sexton
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William "Art" Sexton
Northside Realty
4701 Creedmoor Road, Ste 105
Raleigh, NC 27612
Mobile: (919) 696-3302
Info@Raleigh-Real-Estate.biz
www.Raleigh-Real-Estate.biz