What is the Difference between a mortgage interest rate & an apr??
The easy answer is the mortgage interest rate is the interest rate used to calculate your monthly principle and interest payment, the cost you pay each year to borrow money for a mortgage
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An APR or Annual Percentage Rate reflects the mortgage interest & Other costs associated with taking out a mortgage.
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An APR or Annual Percentage Rate reflects the mortgage interest & Other costs associated with taking out a mortgage.
The APR calculation often confuses both borrowers & lenders too! “Annual percentage rate” sounds a lot like “interest rate” doesn't it?
The APR is not an interest rate, but a "general rule of thumb" measure of the cost of credit expressed as a percentage rate.
The purpose of APR is to provide consumers with a uniform measure cost of a loan. The APR equation includes :
Contract interest rate + the costs of the loan, including any prepaid costs (points, fees, etc.) that are part of the cost of borrowing and by comparing the APR borrowers should be able to compare costs from company to company.
The APR is not an interest rate, but a "general rule of thumb" measure of the cost of credit expressed as a percentage rate.
The purpose of APR is to provide consumers with a uniform measure cost of a loan. The APR equation includes :
Contract interest rate + the costs of the loan, including any prepaid costs (points, fees, etc.) that are part of the cost of borrowing and by comparing the APR borrowers should be able to compare costs from company to company.
The APR Formula
ANNUAL
|
FINANCE CHARGE
The dollar amount the credit will cost you
$ 3 |
AMOUNT FINANCED
The amount of credit provided to you or on your behalf
$ 2 |
TOTAL OF PAYMENTS
The amount you will have paid after you have made all payments as scheduled
$ 1
|
- Total of Payments = Payment Schedule,(including PMI) X Amount of Payments.
- Amount Financed = Loan Amount, - /minus (points, prepaid interest, PMI, & lender fees)
- Finance Charge = (1) Total of Payments -/minus (2) Amount Financed
- Compute APR by dividing the (1)Total of Payments / #number of payments and apply that against the (2) Amount Financed, as if it were the loan amount
Loan Amount -/minus Prepaid Finance Charge = the “amount financed.”
Full PITI -- principal and interest payment (including Private Mortgage Insurance or PMI ) is applied against the (3) Amount Financed as if it were the loan amount. The resulting interest rate is the APR!
Full PITI -- principal and interest payment (including Private Mortgage Insurance or PMI ) is applied against the (3) Amount Financed as if it were the loan amount. The resulting interest rate is the APR!
What are Finance charges?
A prepaid finance charge is any charge paid in exchange for obtaining a loan (i.e. properties paid for by cash would not incur these charges). Finance charges include loan fees (discount points, origination fee, PMI) and miscellaneous fees (tax service, underwriting, document preparation, or lender review few).
Some prepaid items such as per diem interest, escrows for PMI or prepaid PMI, FHA upfront MIP (Mortgage Insurance Premium), and the VA (Veteran’s Administration) funding fee are considered finance charges. Other prepaid items, such as association dues, are not included.
Appraisal and credit report fees are not included when they are collected as part of an application fee. Any inspections (termite, well, septic, etc.) that are required by lenders are not considered finance charges. Fees for recording a deed of trust are not included. Construction loan draw inspection fees *are included.
Some prepaid items such as per diem interest, escrows for PMI or prepaid PMI, FHA upfront MIP (Mortgage Insurance Premium), and the VA (Veteran’s Administration) funding fee are considered finance charges. Other prepaid items, such as association dues, are not included.
Appraisal and credit report fees are not included when they are collected as part of an application fee. Any inspections (termite, well, septic, etc.) that are required by lenders are not considered finance charges. Fees for recording a deed of trust are not included. Construction loan draw inspection fees *are included.
what are third party fees?
Regulation Z (12 CFR 226.4(b).) lists charges from third parties as examples of fees that creditors must include when calculating finance charges:
- · Interest, time-price differential, any amount payable under add-ons or discount system of additional charges
- · Service, transaction, activity, and carrying charges
- · Points, loan fees, assumption fees, finder’s fees, and similar charges
- · Investigation and credit report fees
- · Premiums on insurance protecting the creditor against the consumer’s default
- · Charges imposed on a creditor by another person for purchasing or accepting a consumer’s obligation
- · Premiums or other charges for credit life, accident, health, or loss-of-income insurance, written in connection with a credit transaction
- · Premiums for homeowner and liability insurance written in connection with a credit transaction
- · Discounts to induce payment by a means other than the use of credit
- · Debt cancellation fees
What are Fees Excluded from the finance charge?
- Application fees charged to all applicants for credit
- Charges for unanticipated late payments, exceeding a credit limit, or delinquency
- Charges imposed by a financial institution for paying items that overdraw an account
- Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis
- Seller’s points
- Interest forfeited as a result of an interest reduction required by law on a time deposit used as security for an extension of credit
- Real-estate related fees such as fees for title examination, charges for the preparation of loan documents, credit report fee, notary fees, appraisal fees, and amounts paid into escrow, if these fees are bona fide and reasonable
- Discounts offered to induce payment by cash, check, or other means
Insurance and debt cancellation coverage can also be excluded if the coverage is not required by the creditor, the premium for the initial term of insurance is disclosed, and the consumer signs or initials a written request for the insurance. If itemized and disclosed, certain taxes and fees prescribed by law are also excluded from the finance charge.
Explaining the amount financed would be much simpler if each loan came with an “itemization of amount financed.” The itemization would include a detailed list of the loan amount, the payment schedule, and each finance charge.
payment schedule
The payment schedule is another factor in calculating APR. In determining the payment amount to apply against the amount financed, divide the total of payments by the number of payments and use this average amount. On a fixed-rate loan, the payment schedule is the monthly payment - same through the life of the loan. Variable payments (as in an ARM, Buydown, GEM, or GPM) may be more complicated on a payment schedule. The APR or ARMs can change based upon future interest rate changes. Buydowns, GPMs, and GEMs have fixed payment schedules, so the APR on these loans will not change.
Total Finance Charge
The APR, amount financed, and total of payments have all been calculated—what is the total finance charge? The difference between the total of payments and the amount financed represents the cumulative total of all interest and prepaid finance charges accrued on the loan, or the total finance charge. Subtracting the amount financed from the total of payments reveals this number.