Posted by Rachel/ORWA on 9/5/07 2:34pm
Msg #209476

This is the NEW new math. ;-)

I recently took a SS test, one question of which was "What is APR?" Contrary to what I thought I knew, it turns out the correct answer is "It is the annual rate of the loan MINUS the prepaid closing costs." Huh?

The emailed response to my questioning of this was, "The APR is a higher rate because it is on the amount financed, which is less than the loan amount, because of the prepaid closing costs."

Reply by Becca_FL on 9/5/07 2:45pm
Msg #209485

Huh?

They are on the right track, but there logic is flawed. The amount financed is the loan amount LESS prepaid closing costs. The prepaid closing costs are then added to the interest or estimated interest over the life of the loan. The amount financed + the interest + prepaid closing costs is how the APR is equated, thus showing the "true" cost of the loan.

Reply by Rachel/ORWA on 9/5/07 2:53pm
Msg #209487

Re: Huh?

That's the way I'd calculate it! The answer I chose was, "It is an annual rate including all the borrower's closing costs over the lifetime of the loan," but apparently that wasn't correct.

Reply by Philip Johnson on 9/5/07 3:03pm
Msg #209490

Here's a site that explains it in more detail

than most need, but never the less it does a good job of it.

http://www.mtg-net.com/sfaq/faq/apr.htm

Reply by Lee/AR on 9/6/07 6:52am
Msg #209585

Re: Here's a site that explains it in more detail

That IS the best explanation I've ever seen. Particularly the opening statement that it's used to COMPARE loans. What it's doing at the closing table is like showing up for the party a day late.

Reply by PAW on 9/5/07 3:03pm
Msg #209491

Yes, this is true, sort of. The Amount Financed is less than the principal loan amount because some of the upfront fees are "prepaid finance charges". (But not necessarily all prepaid closing costs!) The finance charge is then based on the amount financed. But Regulation Z of the Federal Truth in Lending law states that all Prepaid Finance Charges are to be considered and included in the calculation of the APR of a loan. To further confuse the issue, it is up to the lender to determine if a certain fee is a "prepaid finance charge" or not (following guidelines). That makes the APR calculation somewhat varied from lender to lender with the same fess and charges.

So, I submit that the answer provided to the SS test question is not necessarily correct, as the APR does include prepaid finance charges, but may not include other prepaid closing costs which are not considered prepaid finance changes.

Reply by Bob_Chicago on 9/5/07 3:19pm
Msg #209494

One way to calculate it is : take the amount of the loan...

subtract the closing costs shown on the "itemiztion of amount
financed" form. Shold be the same as the "amaount financed" on the TIL
Then take that amount and (using a business calculator)
put in the monthly payment and the term of the loan.
The annual interst for that amount is = to the APR
If the loan is an ARM, then it gets much more complicated.
You could honestly say to the bwr, that "The APR is a calculation
invented by the Feds to really confuse you"

Reply by Bob_Chicago on 9/5/07 3:30pm
Msg #209499

Also if there is PMI , FHA or VA insruance. the amount

or the monthly insurance is included with the the payment
stream on the TIL. That will also affect the the APR calculation.

Reply by Becca_FL on 9/5/07 4:34pm
Msg #209511

LOL, Bob! Sometimes, I DO say just that to the brws. n/m