Annual Percentage Rate or APR
After 20 plus years in the business there seem to be two reasons people are asking about APR. The first is that you recieved a disclosure and the APR does not match the quoted rate. The second reason is that a friend or a book said right after a rate is quoted you should ask what the APR is. I think the real question should be WHAT IS AN APR? not WHAT IS THE APR? Unfortunatly with 2010 came the new YSP (yield spread premium) disclosure rules which make it even a little more complicated. Lets try to at least demistify the APR enough so that you are at least comfortable with it. It may be helpul to look at the GFE(good faith estimate), YSP and the Rate vs Pricing pages before proceeding.
Where do I find my APR?
The APR is disclosed on the “TRUTH IN LENDING FORM” also known as the Truth and Confusion Form!
Why is it different from my Rate?
The APR is a method of disclosing certain fees or costs as part of your financing. The key is certain… NOT ALL FEES… and it can vary between Lenders.
What is included in APR?
Origination cost, Discount Points, Broker and/or Lender fees, Interim Interest, PMI, endorsements, CPL and possibly YSP… The closing cost worksheet will usually have a box checked by an item marked PFC (prepaid finance charge. This does not mean you are actually financing these charges) if it is included in the APR.
Is a lower APR always better?
NO! There are many factors that can effect your actual APR so please take the time to understand your individual loan. An ARM (adjustable rate mortgage) loan may have a APR lower than the note rate but that doesn’t mean it is better.
Why is the online APR different from my disclosures?
Online disclosures for APR are structured to appear as low as possible for marketing purpose. (No PMI, last day of the month closing, higher loan amounts that lessen the percentage ratio of certain costs)
Why is PMI included in my APR?
PMI is insurance that protects the Lender so it is considered a cost of financing. There are several types of PMI that will have varied affects on the APR but they do not stay on for the life of the loan so you need to understanf how PMI will show up compared to say discount points.
What is interim Interest?
You will pay interest from the day you close until the end of the month, Your first payment will be the following month because loans are paid in arrears. You close on the 15th of Oct. 16 days interim interest will be calculated into your APR. Yes your APR will change based on the day of closing… Some lenders may disclose 1 day interim even if they know you will have 30 days in order to make the APR appear lower.
Why is the Amount Financed not the same as my Loan Amount?
Certain costs that may vary by Lender are subtracted from your actual loan amount to come up with the amount financed.
How do you get from my NOTE RATE to the APR?
Monthly PMI is added to your Payment and Costs are subtracted. $100,000 loan with $4,000 applicable APR costs would show Amount financed of $96,000. P&I payment of $536 plus $150 PMI would show a payment of $686… so the resulting APR appears as a $96,000 loan with a $686 payment not your loan of $100,000 with a $536 P&I payment based on your NOTE RATE.
OK you made it through some tough sections so let’s look at the loan process and see how that works.