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if you take 6.5% and divide it by 12, you get 0.00541666666, this is your monthly interest rate. now if you take 1.005416666666^12 (12th power) you get 1.066971052.
So, just by monthly compounding, you see that a 6.5% rate actually grows by 6.6971052% a year. (so 6.5 monthly would be the same effective rate a year as 6.6971% yearly)
However, for mortgage loans, it is a bit more complex. Lender charges are divided equally over the 360 payments of your loan, and the interest rate is re-calculated.
your apr is only .25% worse, and the first almost .2 of that is purely the math of compounding.
- MORTGAGE OPERATOR
- Contributions:2081
APR is the total cost of credit to the consumer, the annual percentage of the amount of the Loan plus all the following one-time fees:
Points - both discount points and origination points
Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations.
Loan-processing fee
Underwriting fee
Document-preparation fee
Private mortgage-insurance
The less fees you pay the closest the APR will be to the Interest Rate.
- mo_boop
- Contributions:7
Than you! I think I get it, atleast enough to fell like I did not get the ohkee-dokeyy on the refi. Regardless of a fair of unfair deal I got as a first time buyer I felt taken and under educated. And taken. I wont make that mistake again (i hope):)
- MORTGAGE OPERATOR
- Contributions:2081
Ditech? LOL
The best way to explain APR and interest rate is to give you an example -
Let's say you borrow $100,000 at 7.0% over 30 years. Your monthly payment will be $665/mo. However, the government (don't you wish they'd just go away!) steps in and says, whoa, wait a minute there, partner. You have to pay some money to get that money (whoever said money was free!).
Let's say it costs you $5000 (in certain fees) to get that loan. The government says well, now, you not really paying 7% for that loan, because you're not really borrowing $100,000. In effect, because you have to pay $5000 to get $100,000, you're really borrowing $95,000.
Really? Come now, Uncle Sam, I'm borrowing $100,000.
Nope, not true says he. What Mr. Money Bags has to do is calculate the APR using that $665 payment he calculated at 7% for $100,000. He must apply that $665/mo to the $95,000 you're not really getting, and calculate the new interest rate you won't be paying.
Oh, okay.
Your interest rate, or APR, will be 7.52%.
Makes sense?
- Wayne.T_ .....Colo.
- Contributions:1003
Actually ...... that makes a lot of sense. In this case the government stepped in and said ...
ok, too many funny money people are making shell games of what it costs to take out a loan.
APR is the TRUE COST / TRUE INTEREST RATE of the money you borrow. When the shell games start (ex: Litech says 5.875% but you pay 2 points to get it, plus fees) its easy to look at bank/broker A, B, C, D and compare APR's to see which costs you more.
:)
- Clay Branch, "Georgia Loans"
- Contributions:7836
mo_boop, what state are you in? I think you have a VA loan, right?
- Kat Whitman, "Whitman Met"
- Contributions:663
One thing to keep in mind is that different lenders, whether scrupulously or not, will calculate APR in different ways and utilize different charges in determining it somtimes making their APR artificially low. Also, zillow does a poor job calculating it and it should not be used in comparing quotes. I have had many quotes so far where my rate was the same and fees less, but for some reason someone else on here had a quote on the same loan with a lower APR.
whit- you mean like NOT checking PFC on half their fees? yeah, that happens...
- Martin Wareing, "Martin Wareing"
- Contributions:3772
JM, (good mornin')
That is the only way to get APR to miscalculate is to "manipulate". KW,,, If you have same rate...lower fees... should be impossible that ZILL would calculate yours differently if FIXED..
with ARMS.... it is the margin differential that would change it would be my guess if all else was/is the same.
Hey Martin- good morning to you too :) Did you check out the new HOS thread with the guy offering MMA garbage? Good stuff... Sometimes I wonder about humanity... Then I see something like that, and I wonder no more...
- mo_boop
- Contributions:7
Wa state I locked on a fha.
- Justin Sheftell, "Courtesy Mortgage"
- Contributions:3427
Ask 100 lenders what APR is, get 100 answers. That Rob answer could be amongst the worst ever.
Lew nailed it pretty well. My only addition is to be careful about APR on any ARM loan. The lender cannot forecast what interest rate will be charged during the adjustable period of the loan term, and procedure (for lack of better alternative) is to assume current market conditions remain intact for the entire adjustable period.
The result is that the APR on an ARM loan is completely irrelevant.
APR is a great tool to compare fixed rate loans (of equal length) and determine right away which is better.
"that Rob answer could be amongst the worst..." I'll bet you were a genius at math!
I think its funny asking lenders questions about Yield. (which is what you guys are calling APR, in every other financial circle in the world its called APY) Most lenders don't have a clue about finance. Show of hands, how many could calucalte a loan payment with just paper and pencil?
I've seen loan officers, on these threads, claim that the reason the principle amount of the payment goes up in later years, is the loan is less risky. What a joke!
- Wayne.T_ .....Colo.
- Contributions:1003
"Show of hands, how many could calucalte a loan payment with just paper and pencil?"
Not me ..... I need to use numbers too :)
azrob, in all honesty, I have never been good at long division. This can probably be attributed to a traumatic incident in the third grade.
Who said that ARMS are less risky? That Mike guy from CA? He's the only one I can think of that would stick up for ARM's with such fervor. Are you sure he/she was not being sarcastic?
- Tammy Stockdale, "Colorado Mtg Broker"
- Contributions:6995
Dinkley, that is funny!!!
- Tammy Stockdale, "Colorado Mtg Broker"
- Contributions:6995
Actually,
- Tammy Stockdale, "Colorado Mtg Broker"
- Contributions:6995
Actually,
I
- Tammy Stockdale, "Colorado Mtg Broker"
- Contributions:6995
actually your initials are VD- I think I would change that for obvious reasons!!!!!!!!
oh, this one!!! hehehe... I'm not changing it...
- Tammy Stockdale, "Colorado Mtg Broker"
- Contributions:6995
ok VD........you'll catch some hell for that one!
from you I guess... :)
Jinkies, it's after 11... <yawn> Time to say goodnight.
- Justin Sheftell, "Courtesy Mortgage"
- Contributions:3427
Rob, the poster asked about APR, not APY. He also asked about his loan, not a deposit account.
Your formula is a good answer, it just doesn't correspond to the question asked.
sandiego: can you read?
He said "why is my APR 6.5 when my rate is 6.25"
My "formula" (ok, there really wasn't a formula, merely simple arithmetic, I guess even that confused you) shows that a 6.25% rate compounded monthly would be 6.6971% (APR to you guys, APY to anybody who actually does finance) with zero lender fees.
In every other financial field in the world, from banking to bonds, to investing, to analyzing cash payment streams, this would be called YIELD, however mortgage people seem to choose to call it annual percentage rate, or APR.
- Tampa Bay Mortgage
- Contributions:297
Rob-
I think you are totally off. Based on what you are saying every 6.25% rate would have the same APR, although you are not calculating the APR, you are calculating APY, which is great if the OP asked what an APY means. The APY, I think, may be the return to the investor. The APR is the "total cost" to the borrower.
It is possible to have an interest rate and APR equal each other..
- Geoff Cochems, "gcochems"
- Contributions:1055
"My "formula" (ok, there really wasn't a formula, merely simple arithmetic, I guess even that confused you) shows that a 6.25% rate compounded monthly would be 6.6971% (APR to you guys, APY to anybody who actually does finance) with zero lender fees."
Huh?
You might'n wunna go in back an re cherk yer form u la agin...
- Justin Sheftell, "Courtesy Mortgage"
- Contributions:3427
Rob,
I agree APR is an arcane tool and has many flaws, but this is the mortgage forum and you do agree it is specially defined when applied to mortgage loans, so it is of no relevance how APY is used in other fields.
Also, the difference between simple arithmetic and a formula can be judged by the usage of algebra. If you can calculate APR/APY without any algebra, then you have accomplished something.
ok for the two slow pokes above, in small words:
Every other type of financial field has exactly one RATE. it is called the annual percentage rate, and thus APR = rate. Mortgage loans, in the truth in lending form, quote an APR that is NOT the rate, and that is what the OP asked about: "why is my APR different than my rate?" A perfectly understandable question, as virtually every where else in the financial world APR is the rate.
Even if a lender charged absolutely nothing in up front fees, the APR, as calculated per truth in lending, would be different. This difference is due to compounding, the fact that the rate is actually applied montly, and not just once at the end of the year.
In a bank account, credit card account, bond, or any other field of finance such as MBS, CDR, etc, the true interest cost on an annualized basis is called YIELD. If you guys weren't so lazy, you could goole APR and APY explained, and find a few thousand web sites explaining the same thing.
The saddest quote came above, "ask 100 lenders what APR means, and you get 100 answers." there is only one answer, and honestly, any lender that doesn't understand even this simple facet of loan interest is quite a sad creature.
even if there were NO lender fees, the APR will still be slightly higher than the interest rate due to other PFC's- like per diem interest. You will NEVER find a rate and APR to match, it's impossible. Consumers should take note of the APR to shop around for the best rate/fee combo. Oftentimes, they get caught up in the 'best rate' race, and may end up paying dearly for it. Do brokers have to offer up a TIL yet? In NY, we never had to... and people wouldn't know what the APR was unless they asked, OR at closing when they got the TIL for the first time. It is valuable information, and those that downplay it probably just don't explain it properly. I just say 'This is your rate. This is what it is costing you to get that rate, and the APR reflects those costs. The closer the APR is to your note rate, the better.' end of story. People with high fees are the only ones that should mind it, or not want to explain what it means. After all, explaining to someone why their 5.5% rate comes with a 6.2% APR makes for an uncomfortable conversation- IF they are not being up front anyway.
Interest rate vs anual percentage rate
if I am told that my loan intrest rate is 6.5 and the apr is at 6.75 what does that mean to me?
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