Can someone explain in layman's terms the difference between the Interest Rate and APR? (loan officer, cosigner)

[shaxs]

Okay, so I understand the difference between interest rates and APR- I think. My cosigner is having a hard time understanding it and I am having a hard time trying to explain it. My mortgage broker tried to explain it to me and I kind of understand it, but not well enough to make him understand.

So, if our interest rate is 5.25% and our APR is 6.053, can you help me explain to my cosigner why there is a difference?

We are doing a FHA loan, 3.5% down. I think that is helpful info for that.

[suzie02]

If you borrow $1000 at 10% interest for 1 year and have to pay a $10 processing fee. Your interest is 10% or $100. But your loan really costs you $110 or 11%APR. The $10 fee is not optional so it is part of the cost.
My guess is that at some point lender were offering low interest rates but charging a high fee and the government stepped in an made the tell borrowers the true cost of the loan or APR.

[shaxs]

Originally Posted by suzie02

If you borrow $1000 at 10% interest for 1 year and have to pay a $10 processing fee. Your interest is 10% or $100. But your loan really costs you $110 or 11%APR. The $10 fee is not optional so it is part of the cost.
My guess is that at some point lender were offering low interest rates but charging a high fee and the government stepped in an made the tell borrowers the true cost of the loan or APR.

They did. In 1968 I think, called the Truth in Lending act. So basically the APR is adjusted rate based on the principle and all the fees that go into buying a house? But your payments are based on the 5.25 interest rate.

[suzie02]

Originally Posted by shaxs

They did. In 1968 I think, called the Truth in Lending act. So basically the APR is adjusted rate based on the principle and all the fees that go into buying a house? But your payments are based on the 5.25 interest rate.

Yes. Because you pay the fees up front.

[NVA Mortgage Corporation]

Easy Way To Determine APR

There is a simple way to calculate the Annual Percentage Rate that I discovered when I first started out as a Loan Officer, because I did not have a software program to calculate it for me at the time- (I did not even have a computer or fax).

The annual percentage rate is not as complex as some think.

The purpose of APR is to bring clarity through disclosure, not confusion.
There is a way to figure out the problem of APR by using the Newton Raphson Method,
but there is a much easier way.

The APR is simply a vehicle through which the lender is required, by the federal
government, to translate costs associated with a given loan being considered..FOR EXAMPLE:

If the amount that you are borrowing is $100,000.00 @6.00% for 30 years, you will
have a payment of $599.55 P+I every month for 360 months.
If $3,000.00 within this loan amount is for the purpose of prepaid finance charges (fees) associated with origination, then your net loan amount is actually $97,000.00
At $97,000.00 loan amount (if you are using a rate of 6%), you would naturally calculate a lesser payment because of the reduced loan amount.

All you have to do to figure out the APR, is figure out what % rate you would need
to obtain that same payment of $599.55 at a loan amount of $97,000.00.

The rate you would need would be 6.2865% to produce this payment. (example).
This is your APR.

All it takes is a calculator and a little patience to narrow it down.
At this point, you are armed with the knowledge you need to determine the closing
costs on your mortgage quote accurately.


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