This has got to be the most misunderstood issue in the finance today, A.P.R. or Annual Percentage Rate. So what is A.P.R., this is a mathematical formula used to determine how much money you paid or will pay for a loan. Just like when you go to the corner store and purchase a pack of gum there is a price. I want to make sure this is clear – A.P.R. is not the note rate. The note rate is the note rate. So if you are purchasing a 5.0% rate 30 yr fixed loan with no fees the A.P.R. will tell you what you paid for the loan.
I will give you an example; if you apply for a loan of $200,000, at a rate of 5.0%, with a term of 30 years your payment will be 1,073.64 for P & I. Now if all of your fees totaled up to $10,000 and you wanted a no fee loan the Loan Officer would structure the loan to pay YSP or rebate money to match your loan cost. Now stick with me. In this example you applied for a loan of $200,000 and received a rate that had YSP funds of $10,000 to cover your fees. So in terms of A.P.R. you have applied for a loan of $200,000 and already received $10,000 of those dollars so your adjusted principle in terms of A.P.R. is $190,000. You used the $10,000 to pay your fees and we all know that the real principle loan amount is $200,000 but we are trying to determine what you paid for your loan and yes there are always fees. You don’t work for free and neither does a Loan Officer or a Bank.
So if you work the original above loan structure backward it will show the A.P.R. For example; on the $200,000 loan amount we had a payment of $1,073.64, a term of 30 Years and a new adjusted loan principle of $190,000. So simple math shows us that using these figures the rate, or A.R.P., has to be increased in order for the adjusted principle and payment to work. So in this example the A.R.P. would be 5.46%. This reflects a loan cost of $10,000.
Do not fall into the A.P.R. trap that some Loan Officers try to use on their clients. The A.R.P. has no bearing on what your monthly cost are per month. What you need to focus on is the monthly cost per month and closing cost. If you are paying your loan fees you will always get a better deal than a no fee loan. Pay your fees unless you plan to move within the next five years. If you are working with a direct lender or a retail bank they do not have to show fees and since they get to call their rebate money SRP instead of YSP and they do not have to show it. You would have to contact Sen. Chris Dodd or Rep. Barney Frank to get an answer as to why that is but if it walks like a duck and quacks like a duck, you get the picture.
Direct lenders try to confuse their clients with incorrect A.P.R. information and do convince some people to use them as their APR is the same as their rate. This would not be a problem but their note rate is equal or greater than a wholesale brokers A.P.R. So a higher note rate equals a higher monthly payment. You are paying this monthly payment for as long as you have this loan. The higher the note rate the more the direct lender can sale the note, your loan, and this money goes in there pockets. You did not really think the banks where making record profits in a down market due to financial reform did you?
With all of the financial reform and reform that will surely be in our future always look at the three bottom line figures. What is my note rate? What is my closing cost? What is my monthly payment? And always try to get a fixed rate mortgage. They are not sexy but they have no monthly increases in your future.