Home Buying in 90232>Question Details

Mr. Doc, Home Buyer in 90232

As interest rate of 3.8% is applied to the monthly cost of a loan. Where or how do we apply the APR of 4.7% in a loan?

Asked by Mr. Doc, 90232 Sat Aug 20, 2011

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Mr. Doc:

The interest rate is the actual rate of interest charged on the principal balance of your loan.

APR, on the other hand, is a calculation that was originally designed to help consumers understand the cost of the loan, inclusive of the interest rate cost and other costs associated with closing the escrow transaction.

Many items are included in the calculation of the APR such as interim interest and mortgage insurance, which have nothing to do with the interest rates and closing costs charged by the lender. Due to some of these defects in the calculation, using only the APR to compare lenders is not always reliable.

For a more detailed explanation of APR, including example calculations, please see:
http://docs.Steven-Anthony.com/APR-CanCostYou.pdf

Best, Steve
0 votes Thank Flag Link Mon Aug 22, 2011
Jeanne it confused me.

Mr. Doc the interest rate is what your monthly payment is based upon. The APR is the cost of getting the loan plus the interest rate shown as a percentage over the loan term. APR is used as gage to compare fees. Google APR Calculator to run your numbers.

Happy funding, Rudi
Web Reference: http://www.umboc.com
0 votes Thank Flag Link Sun Aug 21, 2011
It'll not affect you in any way. Your monthly payment will be based on the 3.8%. The 4.7% is the yield of return to the Bank/Investor, after taking into consideration the monies paid up front.
Example: if you borrow $100,000 at 3.8% but have to pay upfront fees (points, etc.) in the amount of $4,000, the Bank is not really loaning you $100,000 because they are getting the $4,000 back at the closing table, which means that they only loaned you $96,000. So by only loaning you that lower amount and still getting the annual return of 3.8% on $100,000, the yield is higher than 3.8%. Sit down with your loan officer, and he/she can show you in writing in a matter of minutes. I hope I didn’t confuse you.
0 votes Thank Flag Link Sun Aug 21, 2011
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