What is A.P.R.?

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APR stands for Annual Percentage Rate

  It is also one of the most misunderstood numbers people find when applying for loans. As consumer loans, and mortgages in particular, turned more complicated it became necessary to help regulate the way lenders advertise and notify the potential borrower of their interest rates. The attempt was to help people compare similar loans from different lenders and to explain the ultimate cost of credit. The APR is defined as the cost of credit to the borrower in relation to the amount borrowed expressed as a yearly rate. This is required by the federal Truth in Lending Act, Regulation Z.

  When you apply for a mortgage the Federal Truth in Lending Disclosure form will be sent. At the top of the page you will see lots of numbers. Two of those numbers are the Note Rate (the actual rate used to calculate your monthly payments) and the Annual Percentage Rate (APR). The Annual Percentage Rate will most always be slightly higher than the note rate because the APR includes other items associated with obtaining a mortgage.

  Did you need an interest rate to get a mortgage? Of course. But you also needed some other things. Origination fees, points, mortgage insurance premiums, inspections, prepaid interest and other items may also be required to obtain a mortgage. If so, these things need to be included when calculating the APR.

Why is the APR useful? I’ll give you an example:

 

  Great Big Bank offers a 30 year fixed mortgage for 5.75%. Really Small Banks or Mortgage Brokers offer a 30 year fixed mortgage for 4.875% – 5.00%. Easy choice, right? Maybe. Before lenders and mortgage brokers were required to state the APR it was hard to tell. Great Big Banks are not required to state the APR so they leave you with many questions.  Great Big Banks claim they have no fees but neglected to mention a few other items. There could be as much as 7 points for the following “third Party Fees”, origination fee, Escrow, Title, Doc Prep, Flood Cert., Curriers, Wire Fee, Attorney Fee, Recording Fee, City or County Tax Stamp Fee, Commitment Fee, Nortoy, Prepared Taxes &  Insurance, mortgage insurance required and the list goes on. 

   For example; at this moment in time Yahoo is reporting that Bank of America is offering a 30 year fixed no cost loan with a rate of 5.875%.  If you are in the market for a mortgage of $250,000 and choose to use Bank of America in stead of a company like the one I work for here is the differance in this case.  Today I could offer you a rate of 4.875% for a 30 year fixed with the A.P.R. of roughly 5.025%.  Agian providing that you did not pay your fees outside of the loan.  The same Bank of America 30 year fixed loan would have a rate of 5.875% for the same 30 year fixed mortgage.  What they are not telling you is this.  If I was to put someone in a loan with this high of an interest rate I would get paid a stagering 2.25% in yield spread or $5,625.00.  Here is how the bank pays for the cost of your loan.  You did not really think they would do it for you for free because you are a great customer did you….?   

 

   On a $300,000 loan, Really Small Bank charged an additional $5,000 when compared to Great Big Bank’s fixed rate loan. You could save an additional sixty-eight bucks per month plus the tax write off with Really Small Bank’s mortgage but you had to pay $5,000 for the privilege. The $5,000 must be included as a cost to obtain the mortgage and is reflected in the APR number.  The Great Big Banks will try to drive this point home and yes this doea apply for a refinance loan where the fees are built into the loan.  This does not apply to a Purchase Mortgage or if you choce to pay the fees outside of a refinace loan.  In a purchace or refinace mortgage where the fees are paid outside of the loan, not taken from the amount the lender funds, the A.P.R. will match the interest rate.  

 

    What makes the A.P.R. differant from the interest rate is this.  If you built the cost of the loan into the loan then these fees are calulated over and above the interest rate.  Over just three years must of the time you are money ahead if you pay the fees upfront. 

 

  Great Big Bank claim they have no points by hidding these fees in what is called yield spread money.  Yeild spread is back side money paid to the bank or broker if they get a loan at a higher than interest rate than the current par rate.  Yes a small bank or a broker will charge you these fees up front but they are tax deductable and if fees are paid up front you will always get the lowest rate available.

 

 

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