APR: Short, Simple & Successful Tips

Whenever you quote a rate, post rates, talk about rates you are also required to post the APR associated with that rate with your assumptions (LTV, FICO, Loan amount). You need to keep your APR within .125% of your original disclosures or someone is going to make you re-disclose prior to closing and perhaps delay your closing. Many of your disclosures display the "APR", therefore you should be able to explain it. I read some recent posts on some LO chat groups on how to deal with and explain APR. Here were some of the comments:

Who cares? It means nothing?

If you need to explain APR you are wasting your breath and sales efforts.

I just tell people it's required, confusing and meaningless.

What's the point? lol

Bottom line, I don't believe many of these LO's actually understood APR nor could they explain it to a borrower. The simple passable explanation that I used to use which worked for me 100% of the time was:

"APR is to disclose to you (the borrower) the actual cost to own the home over the life of your loan as a percentage. Your interest rate calculates your monthly payment, however the APR factors in your mortgage related costs and calculates that into your loan."

Done. Move on to the next question or disclosure to sign. You are a Mortgage Professional and you need to understand this to truly explain it and have your professionalism shine through.

Assume the loan amount is $100,000, term 360 months, rate 4%, and APR fees $2,000. The last consists of all lender charges, but not charges for appraisal, legal/title work or other third party services that they would have paid, if they had paid cash. Mortgage insurance must also get factored in.

1. Enter: -100000 in PV,

360 in N, 4 in I/Yr and 0 in FV.

2. Solve for PMT = 477.42

3. Enter loan amount less APR fees in PV as -98000.

4. Solve for the (APR) I/Yr = 4.165% , APR

If the loan had zero closing costs, the APR would be the effective note rate. Borrowers with short term intentions of holding the note (usually less than 5 years), are better off to take a higher rate with lower or no closing costs. Simple math explanations will win you the deal and ensure future referrals when you can demonstrate how you can truly save them money using legal loan features.

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