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Your Loan Officer Probably Can't Explain the APR Number.

This might be a little "old school" on my part, because such numbers are now spewed out by a computer program. APR numbers are calculated by a software application and can vary depending on the day on which your loan closes. Really.

Correctly defined, the APR is the cost of the money borrowed, expressed as an annual rate. That means that your mortgage loan wasn't free. First, your lender charged you interest. Your lender most likely will have also charged you other fees in addition to that interest, such as lender fees, appraisal charges, and maybe discount points or origination fees. The alleged benefit from comparing APRs from one lender to another is being able to discover additional lender charges that are being levied by either lender. For instance, suppose Blue Bank offers 6.00 percent and no points, and Red Bank offers 6.25 percent and no points. Easy, right? Run to Blue Bank. Not so fast. If you examined the APR, you might find that Blue Bank didn't charge any points, but it charged a 2 percent origination fee, $500 in junk lender fees, and an application fee to the tune of $400. Red Bank, on the other hand, required none of those additional fees. So while the note rate offered by Blue Bank was lower, the additional lender fees made the deal at Red Bank much better.

Knowing What's Included in the APR Is Critical When Comparing Loans.

APR numbers are best used to compare identical loans from one lender to another. The higher the APR number compared to the note rate, the more lender fees you're being charged. If you compare two competing APRs on identical loan programs, then the lower APR might be your best choice.

But knowing what is and what is not included in the APR number is critical in knowing whether you're getting screwed by the lender.

If you have a pencil handy, the correct way to calculate the APR of a mortgage loan is as follows. I'm not kidding .

First, you'll need to calculate the monthly payment.

where

M = mortgage payment P = principal

J = monthly interest expressed as a decimal [//(12 X 100)] N = number of months financed / = interest rate

After you get that number (it's okay to resharpen your pencil), subtract your finance charges from your principal (P) and recalculate the interest payment (J). It's fairly easy to do if you've done it a few times.

Okay, I'll admit it: I've never done it that way, and it's likely that few people have. I always use a calculator. But I can do it. And your loan officer should also be able to do it, but I'll bet you a doughnut that your loan officer can't calculate your APR number by herself. She needs a computer program to do it for her.

The important part of this exercise is understanding that the APR number is important when comparing closing costs from one lender to another. Those loan officers or other pundits who claim that the APR number is worthless are simply not applying its utility properly.

 
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