Calculating Annual Percentage Rate

An FHA Loan or VA loan, which typically adds on the upfront mortgage insurance premium to the mortgage balance, will rise the effective annual percentage rate, also referred to as APR, for that amount is now a finance cost. Calculating Annual Percentage Rate can be often confusing to consumers, however, mortgage regulators require that the annual percentage rate on mortgage loan advertisements be disclosed to inform the consumer about the true cost in obtaining a mortgage loan. Regulators also believe that by calculating annual percentage rate and disclosing the annual percentage rate, it makes shopping for interest rates on mortgage loans to consumers much easier.  ON the old TIL ( Truth In Lending)  at the top left,  it was very confusing for some to both explain and understand what effective APR meant.  A customer, and we have all had them, would naturally be skeptical when they would see it. This had many closers and loan officers (attorneys too)  using a calculating payments to show nominal APR and or going over the amortization schedule to relieve any concerns.  

Calculating Annual Percentage Rate With The New Loan Estimate

The new LE or Loan Estimate , has replaced the old Good Faith Estimate.  There is now a 5 year interest percentage calculation,which breakdowns how much of a customer’s payment goes towards interest the first five years.  On Long term fixed rates, the percentage is typically between 60-75%.  APR changes which require a re-disclosure, do take effective APR changes negatively to the borrower if the change is 1/8 of a point  or more.  Mortgage loan officers need to be cognizant of the potential triggers that could delay or prevent a closing from happening. Use your mortgage insurance tables, often referred to as MI tables, correctly, and over-disclose when possible. If and when you roll in costs, your annual percentage rate, APR, will be higher. So long as the mortgage loan client knows they are financing more than originally anticipated, problems will be avoided.  It is common for an FHA loan to close November, so they can skip up to two payments and run up Christmas Bills. It is all about creative mortgage loan structuring, and timing, depending on what state you live in and how taxes are paid, can help or hinder the mortgage loan process. Here is the actual definition per Wikipedia for your reference.

  • The nominal APR is the simple-interest rate (for a year).
  • The effective APR is the fee+compound interest rate (calculated across a year).[
    Calculating Annual Percentage Rate:
    There are at least three ways of computing effective annual percentage rate:

    • by compounding the interest rate for each year, without considering fees;
    • origination fees are added to the balance due, and the total amount is treated as the basis for computing compound interest;
    • the origination fees are amortized as a short-term loan. This loan is due in the first payment(s), and the unpaid balance is amortized as a second long-term loan. The extra first payment(s) is dedicated to primarily paying origination fees and interest charges on that portion.

About The Author: Ron Granado

Ron Granado is a veteran real estate expert who has a wealth of knowledge in all aspects of commercial and residential real estate. Ron Granado is a guest speaker and guest financial writer and often blogs for us to inform our viewers on the latest mortgage news and topics in the real estate industry. Many real estate agents, mortgage loan originators, real estate attorneys, and consumers seek the advice and opinions of Mr. Ron Granado, a title executive at Plymouth Title Guaranty Corporation based in Oak Brook, Illinois.

Ron Granado

Account Executive | Plymouth Title Guaranty Corp

1301 W. 22nd Street | Ste 505 | Oak Brook, IL 60523

630-300-3900 | |

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