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Rate vs. APR


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Can someone explain the difference between the "rate" and the "APR" and explain the relation of the two? Thanks!

 

ETA: Also, are there any calculators online to help determine what this is? I hope this makes sense???

Edited by kc11478
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Can someone explain the difference between the "rate" and the "APR" and explain the relation of the two? Thanks!

 

Rate is the actual rate you will pay on your mortgage

 

The APR in simplified terms is the Annual Percentage Rate, which must be reported by lenders under Truth in Lending regulations. It is a comprehensive measure of credit cost to the borrower that takes account of the interest rate, points, and flat dollar charges. It is also adjusted for the time value of money, so that dollars paid by the borrower up-front carry a heavier weight than dollars paid ten years down the road.

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OK, so how are the two related? What is the most important for buyers to look for? When we were looking, we honestly only looked at the RATE, not the APR.

Example: My rate is 5.25%, the APR is around 5.7%

 

 

unfortunately, some loan officers do not calculate apr correctly. so it is hard to compare.

 

the logic goes like this:

 

you get 5.25% with fees and apr of 6%..... is that better than 5.5% and no fees and an apr of 6.125% which is better?

the answer is the lower apr.

 

then you have other variables that cannot be measured: length of time in the loans ect....

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Now let me throw some more confusion into the process. As a mortgage broker, I was not required to include several of the 800 fees into apr since they were not "lender fees". However, as a lender I am now required to include all 800 series fees since they are all "lender fees". All lender fees affect the "cost of borrowing money" which is what apr is based upon. According to RESPA, apr is calculated by subracting those fees that directly pertain to the cost of borrowing money from the amount borrowed and then determining what the interest rate is based upon the net loan amount with the same payment.

 

These are the primary 800 fees from a GFE:

 

801 Loan Origination Fee: (Should not be charged by a broker, only a lender) Impacts APR

 

802 Loan Discount Fee: Can be charged by either and will impact APR

 

803 Appraisal Fee: Can be charged by either. However, if charged directly a lender it should impact APR

 

804 Credit Report Fee: If charged by a broker does not impact APR but if by a lender it will in most instances

 

805 Lender's Inspection Fee: Should never be charged by a broker. If charged by a lender will impact APR

 

808 Mortgage Broker Fee: This is where a broker should put any origination fee. It will impact APR. It should never be used by a lender.

 

809 Tax Service Fee: Charged by both, though a broker will charge it as a pass-through fee. A lender charging this will impact APR

 

810 Processing Fee: When charged by a broker will not impact APR. When charged by a lender it will impact APR

 

811 Underwriting Fee: Should impact APR whenever charged and it will normally be charged on all loans.

 

812 Wire Transfer: When charged by a broker does not impact APR. When charged by a lender it impacts APR.

 

There are additional fees that can also be placed in the 800 series and depending on who places it, it may or may not impact APR.

 

 

fla-tan

 

Edited to add: APR, while it was intended to be a measuring point to compare different loan offers, is probably the most useless piece of required information in the entire mortgage process.

Edited by fla-tan
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In an ideal world, APRs would be legally calculated by every loan officer, but, they are not. Lets look at it like this.......

 

ABC Visa sends you a CC with a 1% interest rate....FOR LIFE!!! Woo-hoo, you have a 1% interest rate. But, in addition to the monthly interest charges, they also charge a $200.00 per month "accounting fee" Is your interest rate still 1%? You bet! Are you still saying Woo-hoo? NO!

 

XYZ MC sends you a CC with a 5% interest rate....FOR LIFE!!! You have no "accounting fee" and the only charges on your monthly statement are the charges you made plus any applicable interest.

 

Which is the better deal?

 

APR is/was the brainchild of federal regulators who thought the playing field should be level. Problem is, it is very easily manipulated and is completely fictitious when it comes to ARMs, Pay-Options, Neg Am loans etc. No way to really tell what the index will be at adjustment time so the TILs signed at closing are based upon current indexed rates.

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In an ideal world, APRs would be legally calculated by every loan officer, but, they are not. Lets look at it like this.......

 

ABC Visa sends you a CC with a 1% interest rate....FOR LIFE!!! Woo-hoo, you have a 1% interest rate. But, in addition to the monthly interest charges, they also charge a $200.00 per month "accounting fee" Is your interest rate still 1%? You bet! Are you still saying Woo-hoo? NO!

 

XYZ MC sends you a CC with a 5% interest rate....FOR LIFE!!! You have no "accounting fee" and the only charges on your monthly statement are the charges you made plus any applicable interest.

 

Which is the better deal?

 

APR is/was the brainchild of federal regulators who thought the playing field should be level. Problem is, it is very easily manipulated and is completely fictitious when it comes to ARMs, Pay-Options, Neg Am loans etc. No way to really tell what the index will be at adjustment time so the TILs signed at closing are based upon current indexed rates.

 

 

fla-tan

 

Edited to add: APR, while it was intended to be a measuring point to compare different loan offers, is probably the most useless piece of required information in the entire mortgage process.

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Thanks for the explanations! I'm beginning to think that we should have had Mortgage 101 back in college. I think it would have served a better purpose than "Music Appreciation" or other seemingly useless courses.

Acutally, I'm sure that we rushed through some of this information in Financial Accounting, it just didn't really apply to me at the time!

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Thanks for the explanations! I'm beginning to think that we should have had Mortgage 101 back in college. I think it would have served a better purpose than "Music Appreciation" or other seemingly useless courses.

Acutally, I'm sure that we rushed through some of this information in Financial Accounting, it just didn't really apply to me at the time!

 

Mortgage 101 & Consumer Credit 101 should be required.

And you shouldn't be able to graduate until you get an A+

 

Music Appreciation = I appreciated the slack off class.

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Thanks for the explanations! I'm beginning to think that we should have had Mortgage 101 back in college. I think it would have served a better purpose than "Music Appreciation" or other seemingly useless courses.

Acutally, I'm sure that we rushed through some of this information in Financial Accounting, it just didn't really apply to me at the time!

 

Mortgage 101 & Consumer Credit 101 should be required.

And you shouldn't be able to graduate until you get an A+

 

Music Appreciation = I appreciated the slack off class.I resemble that remark

 

I was a Music Major at a conservatory for my undergrad work... <_< Great guy to have at a party if there is a piano and a bunch of people drinking.....

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Thanks for the explanations! I'm beginning to think that we should have had Mortgage 101 back in college. I think it would have served a better purpose than "Music Appreciation" or other seemingly useless courses.

Acutally, I'm sure that we rushed through some of this information in Financial Accounting, it just didn't really apply to me at the time!

 

Mortgage 101 & Consumer Credit 101 should be required.

And you shouldn't be able to graduate until you get an A+

 

Music Appreciation = I appreciated the slack off class. Was this before or after your comparative classic pole dancing class?

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Thats one class I dont mind going back to school for.

 

Thanks for the explanations! I'm beginning to think that we should have had Mortgage 101 back in college. I think it would have served a better purpose than "Music Appreciation" or other seemingly useless courses.

Acutally, I'm sure that we rushed through some of this information in Financial Accounting, it just didn't really apply to me at the time!

 

Mortgage 101 & Consumer Credit 101 should be required.

And you shouldn't be able to graduate until you get an A+

 

Music Appreciation = I appreciated the slack off class. Was this before or after your comparative classic pole dancing class?

 

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Haha! This thread has SLID downhill....don't ya think? LOL

 

BUT, I do agree with you, DLG. Except that in Music Appreciation, I was required to attend a minimum of three APPROVED concerts per semester. Think orchestra, folk music, bluegrass, and other concerts that don't exactly have college students lined up to get in!

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Haha! This thread has SLID downhill....don't ya think? LOL

 

BUT, I do agree with you, DLG. Except that in Music Appreciation, I was required to attend a minimum of three APPROVED concerts per semester. Think orchestra, folk music, bluegrass, and other concerts that don't exactly have college students lined up to get in!

 

 

How do you think they get an audience for those BIG theaters... :blink:

 

I had a zero unit class (everyone at the conservatory was mandated to take) that met every Friday at noon.

It was just that student performances. If you werent performing you were watching.

 

B

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