Many borrowers do not understand about their mortgage interest rate or APR when they compare possible home loans. The mortgage interest rate is only part of the picture in comparing mortgage loans. Fees and charges on your mortgage loan can significantly increase the total cost of your mortgage.
The Annual Percentage Rate (APR) is designed to be a better indication of the true cost of a mortgage loan than the mortgage interest rate itself. That is because the APR takes into account other factors, for example:
Mortgage APR is the annualised cost of credit on a mortgage loan. It is the interest rate that would produce the same monthly payment amount on your loan as if there were no fees or charges, if you rolled all of your fees and charges into the loan itself.
The best way to start is to quickly compare two mortgage loans, with one having no fees and the other having points and finance charges. The APR figures shown are how we calculate it with Lender Spreadsheet Pro. Please note that other calculations can vary.
Loan 1 - NO additional charges
The following fees are NORMALLY included in the APR:
Lender Spreadsheet Pro calculates APR using the Excel RATE function.
We take into account:
Go to the Setup worksheet
There are 3 options for entering points and other charges:
1. Points Paid %
Total number of "points" purchased to reduce your mortgage's interest rate. Each 'point' costs 1% of your loan amount.
Enter a number that is a %, for example to add 1 point, enter '1'. You do not need to enter '%' after the number.
1 point on a $125,000.00 loan would cost $1,250.00.
As long as the points paid are not a broker's commission, they are considered tax deductible in the year that they were paid
2. Loan Origination Fee %
This is the percent of your loan charged as a loan origination fee.
For example, a 1% fee on a $125,000.00 loan would cost $1,250.00
Origination points are fees paid for the evaluation, processing, and approval of mortgage loans. The more discount points paid, the lower the interest rate on the mortgage.
1 point is typically equal to 1% of the mortgage amount. Unlike some other mortgage fees, origination points are not tax-deductible
3. Other Finance Charges
If you have any other finance charges, these can be entered here.
Go to the Setup worksheet
In our example below, we have enter 1 point for Points Paid and 1 point for the Origination Fee %. We have also entered 500.00 for other finance charges.
If the loan amount is $125,000.00, each 1 point is $1,250.00.
As there are 2 points entered, the total points is therefore $2,500.00.
If you include the $500.00 other finance charge, the total charges is therefore $3,000.00.
To enter Points Paid %, enter a number in Cell D51
To enter Origination Fee %, enter a number in Cell D52
To enter any other Finance Charges, enter a number in Cell D53
If you now look a the Loan Summary, you will see that the Amount Financed in Cell F55 is $122,000.00 and not the Principal Balance of $125,000.00, as the $3,000.00 in fees has been deduced.
As a further example, you can compare the Loan Summary above with the one below for a loan that has NO Points or other charges.
You will notice that the amount financed is the same as the principal balance and that the APR is less as there are NO fees.
If you would like more information on APR check out the Consumer Finance Protect Bureau (cfpb)
Learn more about the difference between a mortgage interest rate and APR.
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Visit our website Mortgage-Investments.com where you will find excellent FREE to use online financial calculators and spreadsheet downloads, including an APR Calculator.
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