“Knowing the interest rate & the annual percentage rate, helpful or confusing?” by: Saeed Ghaffari

“Knowing the interest rate & the annual percentage rate, helpful or confusing?” by: Saeed Ghaffari

February 3, 2021

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By Saeed Ghaffari

Saeed Ghaffari

Saeed is the founder of Money, Real Estate & More. With over 30 years of experience as a lender, investor and a real estate professional, he provides free consulting in these fields. To connect with Saeed, sign up for free / log in on moreandmorenetwork.com

Saeed Ghaffari

Get Lucky today! Apply for a loan through our Find a Lender Page on moreandmorenetwork.com or reach out to Saeed to be connected with a lenderand if the loan amount you obtain is within $3000 of the loans on this table, More & More will credit you $300 towards your closing costs.

Crystal Ball Anyone

Above rates are courtesy of Loan America at 0 points. For APR and qualification criteria, you may connect with Loan America on moreandmorenetwork.com

 

Crystal Ball Anyone?

Knowing the interest rate & the annual percentage rate, helpful or confusing?

Well, it does not take a crystal ball to answer the question above. You just need some understanding of how the finance industry works. After working over 30 years as a mortgage lender, I hope to be able to shed light on the topic for our readers.

Providing financing to borrowers is not free of cost to the lenders. These costs include cost of money, the interest they pay on the money (to their investors or government) and their operation costs such as salaries to employees, marketing, technology, etc.

The lender expenses are passed on to borrowers plus some for profit, after all they are in the business to make money, like the rest of us.  

The way they pass the expenses of a loan to a borrower is in two ways, a recurring annual interest rate and a one-time fee know as up front Closing Costs.

As a consumer we need to be able to compare loans and their cost with one another to decide which ones cost less and serve our financial needs at a time.  To figure out the true cost of a loan a formula has been developed that incorporates the upfront closing cost as a percentage of the loan, adds it to the recurring interest, and the total represents the APR (annual percentage rate) or the true cost of the loan.

The following example will better demonstrate the above explanation.

Loan Amount: $500,000

Interest Rate: 2.5%

Terms: 30 Years Fixed Rate

Monthly Payment: $1,975.60

Assumed Closing Costs: $3,000.00

To come up with the true cost of the above loan (the APR), one must add the closing cost to the loan amount and calculate the payment based on the same rate and the new loan amount. Based on the new payment, go back and figure the interest rate would-be on the original loan amount and the new payment. See the following:

New Loan Amount: $503,000 (original loan amount + closing cost)

Interest Rate: 2.5%

Terms: 30 Years Fixed Rate

New Payment: $1,987.46

Figuring out APR:

Loan Amount: $500,000

Terms: 30 Years Fixed Rate

Payment: $1,987.46

Calculate the Interest Rate known as APR:  2.55%

 

The APR is the number a consumer must know on different loan offers to be able to compare them to one another. However, it is not as simple, and it can get tricky at times. Not every single item on the closing costs column is considered in figuring out the APR. For example, appraisal fee is not an APR item, some title insurance expenses are, and some are not. Credit report fee is not. Unfortunately, not all loan officers and their support team are versed on the above and at times they misrepresent the APR on the loan and the consumers don’t know any better either to detect their error.  On top of that there are unscrupulous lenders who purposely manipulate and play with the numbers to misrepresent the cost of a loan lower than what it actually is.  Candidly, while the concept is good in theory and is designed to protect the consumers, in practice, it’s messy and causes more confusion than it offers value. That’s why it is so important to work with trustworthy and experienced lenders. A small fraction of a rate could cost you quite a few extra thousands of dollars through the course of the loan. 

For all your mortgage and real estate needs sign up for free on moreandmorenetwork.com to connect with hundreds of professionals listing their businesses and services on our platform. You may connect with Saeed on moreandmorenetwork.com for free, sound and unbiased advice on any real estate and mortgage related topic.

We did not need a crystal ball for the above, but if I were to guess who will take the Super Bowl this year, for someone who hasn’t watched a complete game all season long, I would definitely need one.  Whether it’s going to be Tom Brady and the Tampa Bay Buccaneers or The KC Chiefs, I look forward to a competitive and a fun game. We all need it and I will be watching it too.

Tip of the week: Reward good characters, get out of your comfort zone, and enjoy the ride.

Don’t forget to take advantage of our Find a Realtor page on moreandmorenetwork.com to connect with an expert in your area.

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