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.