The difference between APR and actual note rate is very confusing, especially for First-Time Home Buyers who haven’t been through the entire closing process before.

When shopping for a new mortgage loan, you may notice an Annual Percentage Rate (APR) advertised next to the note rate.  The inclusion of an APR is actually mandated by federal law in order to help give borrowers a standard rule of measurement for comparing the total cost of each loan.

The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate to prevent lenders from “hiding” fees and up-front costs behind low advertised rates.

According to Wikipedia:

The terms annual percentage of rate (APR) and nominal APR describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate. 

• The nominal APR is the simple-interest rate (for a year).
• The effective APR is the fee+compound interest rate (calculated across a year)

The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year.

However, the exact legal definition of “effective APR” can vary greatly, depending on the type of fees included, such as participation fees, loan origination fees, monthly service charges, or late fees.

The effective APR has been called the “mathematically-true” interest rate for each year. The computation for the effective APR, as the fee+compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or treated as a short-term loan due in the first payment.

What Fees Are Typically Included In APR?

• Origination Fee
• Discount Points
• Buydown funds from the buyer
• Prepaid Mortgage Interest
• Mortgage Insurance Premiums
• Other lender fees (application, underwriting, tax service, etc.)

Since origination fees, discount points, mortgage insurance premiums, prepaid interest and other items may also be required to obtain a mortgage, they need to be included when calculating the APR. Fees such as title insurance, appraisal and credit are not included in calculating the APR.

The APR can vary between lenders and programs due to the fact that the federal law does not clearly define specifically what goes into the calculation.

What Does APR Not Disclose?

• APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change.  But Adjustable Rate Mortgages always change over the course of 30 years.

• Balloon Payments

• Prepayment Penalties

• Length of Rate Lock

• Comparison between loan terms – EX:  A 15-year term will have a higher APR simply because the fees are amortized over a shorter period of time compared to a similar rate / cost scenario on a 30-year term.

APR Comparing Examples:

• Bank (A) is offering a 30 year fixed mortgage at 8.00% APR

• Bank (B) is offering a 30 year fixed mortgage at 7.00% Note Rate

Easy choice, right?

While Bank (B) is advertising the lowest Note Rate, they’re not factoring in the origination points, underwriting / processing fees and prepaid mortgage interest (first month’s mortgage payment), which could essentially make the APR much higher than the one Bank (A) is advertising. So Bank (A) may show a higher rate due to the APR, but they could actually be charging a lot less in total fees than Bank (B).

…..

Before lenders and mortgage brokers were required to state the APR, it was more difficult to find the truth about the total borrowing costs of one loan vs another. When comparing mortgage rates, it’s a good idea to ask your lender which fees are included in their APR quote.

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I was alive in the early 80’s but I wasn’t worried about my mortgage payment. I was busy watching ET and playing little league baseball. But to hear people who are just a little bit older than I am, getting a 30 year mortgage at interest rates in the high teens in the early 1980’s wasn’t uncommon.

Assume for a moment that inflation kicks in and at some point in the future, the average rate that you see quoted on a 30 year fixed rate mortgage is 10%.

What does that do to your buying power?

If interest rates rise to 10%, your monthly Principal and Interest payment on a $200,000 mortgage will rise by $742/month.

Although I don’t remember what 10%-20% interest rates felt like, I can remember well what 7% interest rates felt like – it wasn’t that long ago! If interest rates rise to 7%, the P/I payment on a $200k loan will go up by $327 per month.

Are we going to see 10% interest rates in the foreseeable future? I don’t know, I will leave that to the experts to pontificate about. What I can say for certain though is that as interest rates rise, people are going to buy “less of a house” than they are currently buying.

And I wonder what that will do to real estate prices…

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Yesterday, the Fed announced that they would buy up to $1.2 Trillion worth of mortgage backed securities and long term treasuries – which should result in lower rates in the short term. I also expect it to result in higher rates in the longer term (possibly much higher) as inflation kicks in – although the smartest guys in the room don’t seem to think that inflation poses that big of a threat:

“In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued…” the Fed said in a release.

“Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

Well, I am glad that I am not the one faced with task of solving these problems, but from everything I can tell – here is what it all means in plain English:

In the short term, mortgage rates will go lower.

After the “short term” low-rate period?

Look-out.

Phoenix Arizona Mortgage Rates March 19 2009

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Will Interest Rates Go To 4.5%?

We have been asked that question often recently. Normally, when people ask us “what is going to happen with interest rates” we usually reply with “well, one of three things can happen:

• They can go up
• They can go down, or…
• They can stay the same.”

If you asked me the question today of “are interest rates going to go down?” my answer now is “yes, interest rates will go down in the near term and here is why…”

Interest Rates Will Go Lower

The Federal Reserve released implementation details on its previously announced program to purchase mortgage-backed securities. This is a drastic new step that the government has taken in an effort to keep mortgage rates low, which in theory will spur demand and help increase home sales numbers as well as provide some help to those homeowners who are currently struggling to make their house payment.

Only fixed-rate Mortgage Backed Securities that are guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae are eligible for purchase. Other products such as adjustable rate mortgages, jumbo loans, and structured bonds are excluded.

Purchases are expected to begin as soon as next week and up to $500 billion will be bought. This $500 billion is in addition to the current Treasury’s agency Mortgage Backed Securities purchase program which has been running at $20-25 billion in recent months.

$500 billion is a huge number — probably big enough to cover most of the 2009 mortgage backed securities agency supply for 2009 and so it is difficult for me to see how mortgage rates don’t go lower – possibly solidly into the 4% range that everyone seems to be talking about.

Will Mortgage Rates Go Lower?

Yes.

And I reserve the right to be wrong. Right along with all of the other “experts” that you see on CNBC.

Happy New Year!

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Arizona Mortgage Rates for October 15, 2008

Rates have moved up significantly in the last week.

As we have mentioned before, trying to predict interest rates is tricky and we prefer not to try to be “rate predictors”.  The only advice that we can give during this period of uncertainty in the markets is that if you are currently in the process of applying for a mortgage loan, lock as quickly as you can in the process.

After all — when talking about interest rates, one of three things can happen:

They can go up, they can go down or they can stay the same.

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