APR. What is it and how is it calculated?

APR (Annual Percentage Rate) is one way a lender is required to disclose the total cost of the loan to you.  It takes into account the interest rate you are being charged along with the fees you are being charged that are associated with the lender in order to originate the loan.

 Example:

 You’ve just purchased an automobile with a loan that was disclosed at 7.99% APR.  when you signed your loan paperwork and picked up the automobile, the note rate was 7.99% as well.  The two are identical because there were no upfront lender fees associated with getting the loan.

Home loans however, are different.  Consumers typically pay origination fees and lender fees that are associated with originating their loan.  Therefore their APR will naturally have to be higher to account for the upfront fees (closing costs) they are paying. 

In essence, APR is really what I would consider to be, just an effective rate.  It’s an interest rate disclosed by a lender that explains the total cost of a loan as a percentage.

 Calculations:

 The not so technical way is to calculate the monthly principal and interest (pmt) based on a  loan amount, interest rate and loan term.  THEN  subtract any lender fees associated with originating the loan from the previous loan amount and recalculate the rate using the newly calculated loan amount and the previously calculated payment and term.

 Here is the Excel way of doing it:

 pmt = payment, r = rate, n = term, pv =  present value, npv = new present value

first:  figure out payment using    “=pmt(r/12,n*12,pv)”

2nd:  subtract the fees from present value to calculate new present value    “pv-fees = npv”

3rd:  recalculate the rate using the new present value      “=r(n*12,pmt,npv)

To better understand APR and how it affects your unique situation, I recommend you seek the advice of your trusted mortgage professional.  If you don’t have one, feel free to contact me with your questions at:  mknotek@bellmortgage.com

About Mikal Knotek:

Knotek has been a Senior Loan Officer with Bell Mortgage since 1997 and has been a Presidents Club member since 1998.  Mikal is versed in commercial finance and understands how to explain the financial implications home financing has on his clients short and long term financial future.  Mikal was also designated by Minneapolis-St Paul and Twin Cities Business Magazines as a “Super Mortgage Professional”  an honor given to less than 4% of the mortgage lending community.  Visit Mikal online at http://www.mjkmortgage.com/, mknotek@bellmortgage.com or call him direct at 952-278-8707

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