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What is Mortgage APR, Can You Explain It?

WHAT IS MORTGAGE APR, Can You Explain It?

APR Demystified and APR Predators Exposed

First, lets demystify Annual Percentage Rate (APR).

Mortgage APR was designed to allow consumers to use one standardized number to compare each lender's rate for the same type of loan while rate shopping. It is supposed to represent the borrower's cost and it works like this.

If I lend you, $10,000 and, I charge a $500 Bump-ta-Bump Fee, you will actually receive $9,500, however you must still repay me $10,000. Mortgage APR is my real yield and your real cost on this loan.

We agreed that you will repay the loan at 8% interest on $10,000, HOWEVER you only received $9,500 therefore I will earn more than the 8.0% interest rate I charge on $10,000. In this case, my yield (APR) is 9.799% on the $9,500 you received.

APR is the lender's yield on dollars actually lent ($10,000 minus $500 = $9,500); in this case, the lender's yield (APR) on $9,500 is 9.799% (APR is computed as if the above example is a 30 year loan)

The $9,500 also represents the Amount Financed in the Truth In Lending (TIL) disclosure.

For those of you who use spreadsheets the Rate Function will find APR. Use the Amount Financed for Loan Amount and use the monthly payment on the actual loan amount.

Fees that must be subtracted from a mortgage loan to properly calculate Amount Financed for APR

Origination and Discount Points

Processing and Lender Fees

Pre-Paid Interest (Use 15 days when closing date is unknown)

Monthly Mortgage Insurance must be added to the payment of all FHA loans and Conventional loans greater than 80% loan to value.

The inclusion of Mi or MIP accounts for the large spread between Rate and APR on loans with mortgage insurance.

NOTES: Fees Not used in APR calculation; third party fees such as appraisal and credit. APR can only be compared on loans of the same type and amortization period

How Do APR Predators Work?

Many sophisticated borrowers shop interest rates by searching for lowest APR which, if property stated, is a valid way to compare similar loans. Unfortunately, APR is not always stated properly.

How is advertised Mortgage APR is misstated?

Prepaid Interest is not included - most common deception and true on all online Rate sites i.e.: Bankrate.com, Interest.com, Mortgage101.com, ShopRate.com, etc.
Prepaid Interest is understated - must be 15 days when closing date is unknown.
MI or MIP is not included in the APR on any online rate sites, Bankrate etc.
Some lenders do not include MI or MIP on their web sites such as Amerisave.com
Lender fees are either understated or not included in the APR calculation. This is a tricky one because No or Low Lender Fees does not necessarily indicate a predatory lender. Some lenders charge a higher rate and no points or fees for their so called "Zero Cost" loan. However, the "Zero Cost" rate will always be higher than a rate with points and/or fees.
Notes to the above:
- there is no such thing as a Zero Cost loan and some states prohibit lenders from advertising Zero Cost Loans.
- The spread between Rate and APR on loans greater than 90% LTV should be at least 0.700%. When it is not... you are being scammed

Rate - Points - Fees are all interdependent

The best way I can explain this is show various Rate - Point - Fee combinations where the lender is making the same gross profit on each combination.

In the examples below, we will use a $200,000 loan amount and Lender gross profit of $1,000, on a day when the Lender's cost for a 5.000% rate is par (0 point).

Best Rate: $1,000 Lender profit in various combinations of points and fees

Rate	Fees	Points	APR	Profit
5.000%	$1,000	0	5.044%	$1,000
5.000%	$500	0.250	5.044%	$1,000
5.000%	$0	0.500	5.044%	$1,000

Lowest Fees:
You pay $0 points and fees and Lender's investor pays the lender $1,000 for the higher rate.

Rate	Fees	Points	APR	Profit
5.125%	$0	0	5.125%	$1,000

The point here is that lenders design their loans to provide talking points for their sales staff (loan officers). They all require a certain profit margin and it is not important the way the loan is structured as long as the closed loan delivers their required profit margin.

This illustration also points out the value of correctly stated APR as a way of comparing mortgage loans. For the sake of these illustrations, prepaid interest was not used. If 15 days PP was calculated it would have increased each APR by 0.019%.

Education is Consumer's Only Real Protection.

Bill Ladewig

800.664.7283 (SAVE)

Bill@YourFhaGuru.com

Website

Bill Ladewig is a Mortgage Broker Licensed by the California Department of Real Estate 00968137

NMLS #291249

San Diego FHA and VA Home Loans Escondido Mortgages Escondido Localism San Diego FHA and VA Home Loans San Diego Localism San Diego UFMIP Escondido Mortgages Escondido Localism San Diego Mortgage Ultimate Mortgage Calculator

Posted by Bill Ladewig Your FHA Guru - FHA and VA Loans Since 1970 on 01/29/2010 10:08 AM

Comments (170)

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Originally posted at: Bill Ladewig's Blog: What is Mortgage APR, Can You Explain It?

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170 Comments on What is Mortgage APR, Can You Explain It?

SEP

2009

When are the $1M plus loans gonna open up? We need that product for any kind of rebound.

Michael, I think it will be a while before we see super jumbos again.

Bill,

Wonderfully educational! Thanks for posting this.

Mike in Tucson

Thanks Mike and you are welcome.

Thanks Bill, I'm going to share this with my office.

Great information for the consumer. It is impossible to compare some loans because many lenders don't send out good TILs and GFEs

Excellent explanation, Bill.

Great information Bill, but I think more people might benefit from it if you were to dumb it down more. Still pretty technical IMHO.

Hi Bill ~ Lots of good information. This is another one of those posts I'll bookmark so I can come back and refer to it when I need to.

Even if banks don't supply the info the consumer needs, this post tells them what to ask for. In my experience a lot of times buyers don't ask the question, because they don't know what to ask. This will help them figure that out.

Denise

Michael, thanks and spread the word.

Russ, maybe if we can educate more consumers they will demand accurate GFEs and TILs

Thanks Brian

Daniel, working on it.

very educational and very informative and even a little confusing

Denise, an educated consumer is good for the good guys and bad for the other ones.

You are the first person I have been able to get the explanation of apr that I can understand. Thank you for sharing.

Bill: Thank you for presenting this valuable information. Something I am embarrassed to admit is that as a new loan officer, I was never trained on APR as it realtes to the cost of the loan.

When I started having closings and clients asked WHY the APR was higher....? What rate were they "really" getting????!!!!, I finally had to sit down and study this on my own to be able to answer this question, which I did.

However, no where have I ever read an explanation like this.

Thank you, mortgage professor Ladewig.

accurate GFEs & TILs. Oh if only that could be true.

David, thank you.

Janet, unfortunately Loan Officer training has not improved much since I began. It took me years to get a good explanation of a "basis point" and that is really simple.

My guess is that most loan officers would not be able to explain APR. One of my nasty little tricks is to coach Realtors to ask my competition to explain APR as a knowledge test.

Janet, that means alot coming from a respected peer, that you so much.

Best regards, Bill Ladewig

Excellent information. I will definitely share with my clients .

Thank you for this guideline:

"The spread between Rate and APR on loans greater than 90% LTV should be at least 0.800%. When it is not... you are being scammed"

Nice post. I think just saying here are your expenses tied to getting this loan. One simple number may be more helpful. Just like the truth in lending statement. KISS

Bill -

Excellent post, clearly written and a great explanation of a complicated topic for many in this business. As Janet said, it's often the most mis-understood item in the closing package and I've often had to step in with an explanation when the title person begins to stammer (actually DE requires an attorney conduct settlement so it doesn't happen that often).

Very well done and I like the comment about teaching your Realtors to ask the question of other lenders as a knowledge test. I do that as well :-)

Wow, Bill, that was probably the best and easiest explanation of APR and what to look out for I've ever seen. Thanks for the great article!

I just had a client go to a lender who was NOT including the yearly property taxes into the mix. Talk about a scary lender!! NO WONDER the PITI was so low . . . uh!

OMG is right. Thank you so much for the detailed explanation and examples. If this is so difficult for Realtor's to comprehend (which I admit it has been for me) then no wonder there is so much so-called "reform" happening for the consumer. I have never heard this explained so comprehensively.

Thanks for putting togather all the details.

This is a great explanation. Definitely needed for the consumers, and probably good clarification even for some in the industry.

Funny they call it "truth in lending" this is so confusing! I think they need to define "truth in lending"... it is so difficult to compare one lender to another.

Very well stated. Thank you for this information. It was written so the average person could understand it. Good job.

Great post -- I think that this will be very helpful to the first time home buyers.

Hi Bill -- Very well written post. While I could follow it, I am in an allied field as a REALTOR. I truly wonder how much effort the average consumer is going to spend trying to decipher how to make a good decision when most people are on so much information overload today.

SEP

2009

Now this was an explanation of APR that I could understand. Thank you!!

So much great info. Will bookmark and criculate. thanks.

Great information. I've been looking for an explanation on this for a while.

Bill - Great to see APR explained on AR. I've taken pride in doing this in all my closings. It lets a buyer know I'm not just pushing docs across for them to sign, but I understand the docs and want them to understand them as well...

Bill - Thank you for your post on APR. I've been trying to get the loan officers that I work with to do this for me. This is the first time I got an explanation that I could use to share with my buyers.

Great info with a great explaination, very appreciated!

One of the most informative blogs i've seen. Now I have finally come accross someone who deserves the moniker "GURU"

Nicely done, Bill.

"My guess is that most loan officers would not be able to explain APR. One of my nasty little tricks is to coach Realtors to ask my competition to explain APR as a knowledge test."

It's funny that you mentioned this, as I have done the same over the years. It is amazing how fast the other LO's start stuttering when this one is asked.

Bill,

Good post. The Amerisave info is funny as I had a customer recently telling me about their rates. I went online to check it out and did a doubletake. 4.625% interest w no points on a conventional 30 year fixed. Just try to close that loan.

Patrick

Excellent post as many people do not fully understand APR and how it affects them.

Thank you, for all the time you invested to share this with us.

one man's opinion;

the concept of the apr was very good, the practical application was/is a failure.

i refer to your comment if calculated correctly, or maybe i'd like to add, consistently from one institution to another.

one investor sent us a 6 page document listing all the different fees, who they were paid to, and are they a finance charge, in their opinion. six pages, ouch.

remember when the fed's (regulators) used to phone shop us to make sure we were quoting apr's when we quoted rates?

by the way, nice job with making the technical stuff understandable

Bill: Thanks for the explanation-I appreciate it. I believe every LO should be transparent about their business. It's sad that there are people who arent'. They look upon it as a game and are really just glorified salespeople who bring little or no value to the consumer. Thanks again!

Very good post on a subject many of us do not really understand. It seems like they always get you with the fees.

Dear Mr. Ladewig,

I think this is a great explanation of APR. I love the way you demonstrate in your chart the various ways in which the lender can make $1,000 profit through a combination of points, fees, and/or premium. It is important for consumers to understand how mortgage interest rates are priced and the true cost of the transaction to them.

However, I would disagree with the following: "The spread between Rate and APR on loans greater than 90% LTV should be at least 0.800%. When it is not... you are being scammed." I can send you GFE and TIL of FHA loans of above 90% LTV I have in process and have closed with very accurate fees disclosed, including mortgage insurance, prepaid interest, lender fees, origination fees, etc. where the spread between rate and APR is less than 0.8%. I am very careful to disclose all settlement costs as accurately as possible to avoid potential closing delays due to needing to redisclose if the APR is off by 0.125%. Also, to ensure the buyer is asking for the correct amount of seller concessions needed in closing costs during negotiation.

Many thanks for this post!

Sarah

Sarah, thanks for the correction. Your .762 spread is correct and your TIL is spot on. I not sure why all my APR/Rate spreads were higher than .80. Maybe because I was using a higher loan amount. Based on your information I reduced the spread in my blog to .70

Thanks again for your correction.

Best regards, Bill Ladewig

Good Call Bill.

We need to post this on billboards across America! :)

Really good info - you could take that and turn it into a brochure to help the consumer

Bill: Just for the record....and no disrespect intended to the Realtor community...

But if a Realtor asked me to explain APR to them I could be pretty sure they did not understand it well enough themselves to be able to use this as a test for me.

Heheheheheh unless it is one of my Realtors, they have the script.

Bill,

Good explanation.. I think you touched on one of the bigger consumer confusion / advertising issues affecting the APR calc and that is the loan amount.. many advertisers use small loan amounts to reduce the margin on the rate /APR.

The APR has never really served the consumer well and I feel should be abandoned in favor of simply accurate GFE.

Additionally the vendors providing Loan origination software allow the APR fees calculation to be edited and thus the APR could be in error without the LO knowing. This probably contributes to the errors out there. For a calculation that has not changed why not make it a fixed calc within the software?

The GFE, TIL disclosure rules being different between banks/ crdt unions and Mortgage Brokers is probably the biggest issue facing our industry..the YSP built into higher rates is also the elephant in the room regulators will not address between brokers and bankers GFE differences.. we have been having this discussion for years with little improvement..too bad really.. this could be remedied.

Thanks for the great post.

Regards, Michael Z.

Love the post Bill! APR can be the best friend of those of us wearing white in the loan business. I have a chart similar to this I show and explain to all my clients when they are signing the up-front disclosures. Shockingly, I even tell my clients how much money I am planning to make on their loan (front and back as these numbers show on the final HUD) so they can decide BEFORE closing if they believe I am being fair. Over the last 10 years I have only had 1 client balk at my income. He went to another company that subsequently screwed him on his rate--he has been a client of mine now for 8 years. Honesty is the best policy--it creates repeat business and referrals.

Michael, Thank you for your excellent comment. You are exactly correct that APR has not served the consumer because it is misunderstood and easily misstated.

I agree the APR calc for LOS should be fixed. The ability to edit LOS is a problem because it allows unintentional errors for the majority of Loan Officers who do not understand APR and opportunity for those who are less than honest.

The differing YSP disclosures for brokers and bankers has rankled me for years. If brokers must disclose YSP then banks should also be required to disclose because we both profit in exactly the same manner.

But it all boils down to consumer education. The more the consumer knows the better it is for the White Hat lenders.

Kendall, Honesty is the best policy. Rate shoppers now have access to a ton of information to compare lenders. The lender who discloses everything up front and clearly explains the system will win most of the business.

Bill,

Great post. We shop and negotiate loans for our buyer clients and we articulate the difference between lender offerings as a "value differential" at closing. But we always need to discuss why the APR is not always a good reference. I think your examples work well and we'll be discussing them at the nest staff meeting.

Thank you!

Great post Bill! With the advent of the Mortgage Disclosure Improvement Act, it's more important than ever that consumers are working with lenders who accurately disclose APR... there's more on the line for them than ever (including delayed closings, financial penalties, and more). It's so important that lenders educate their realtor partners on these topics because they now affect all aspects of the real estate industry, not just lending. You might enjoy an article that my husband and I posted a while back called "New Mortgage Laws: 7 Critical Things Realtors Need To Understand To Protect their Clients, their Business, and their Income." Thanks again for the valuable post.

Great information in an idiot proof format. This is extremely hard, if ot impossible, for the average Joe to understand.

Thank you for putting this together in such an easy to understand manner. Will definitely be sharing this with my clients and probably putting a few lenders to the test.

Bill, thanks for comment #54 regarding Brokers and so called Lenders. Table funding has long been an excuse to not have to demonstrate the true profit to the company. As a broker and as one who had worked for lenders for 15 years, I have had my fair share of explainng APR. You explination is consice. I prefer to use about a 5 minute or less explination to my customers that takes them through the understanding that APR represents their payment as if the primary loan and the applicable fees were being paid with no change in the payment for their new loan which they have just asked for. Better stated, we go over the new loan and arrive at the PI. I then show the APR and explain the higher rate by demonstrating that if the payment and loan amount don't change then it's the interest rate that must have changed. In the end I am sure to explain exactly what my company is being paid including fees to do the loan and ask that if they compare that they ask any other company for the same information.

This works well and at the end of the loan there are no issues as I can confirm on the final documentation that I am only receiving that which was previously agreed to. Thanks for your blog

Bill

As usual, enjoy your posts. I don't pretend to have all the answers, but you really hit a nerve since competing against those that play the numbers game with APR are rampant.

Even when I was with the Big Boys....I won't mention the name...pretty common today too, I will never forget a training class where the trainer admitted corporate played with the APR categories....all within legal counsel concurrence. Amazing.

Not sure about you, but non of my lenders can provide me a detailed list of categories that must be included in the APR.

Now that's one for the books.

Best Regards

I favorite topic of mine for years in various mortgage related chat sites. One problem is knowing EXACTLY which fees are included in APR. For five years Ive posted that as a main topic in sites containing over 50,000 mortgage agents members and have never received a consensus. Never.

Second problem is the way to figure it isnt EXACT because of closing times, as mentioned above.

We never should have had APR. In fact, several years ago there was talk about discontinuing its use. All a borrower needs to know is what the BASE RATE is and what the costs are in TOTAL DOLLARS. Both are bottom line and can be compared by a 5th grader. Its just another stadard set by our 'industry ignorant' government. Have any of you actually picked up (its heavy!) and tried to read the regulations concerning TIL/GFE/APR?

Its 10% law and 90% lawyer opinion letters! We are supposed to be within .125. The punishment is not a little slap on the wrist. With the new disclosure laws over complicating matters even more, we must not go under OR OVER without problems. Many brokers used to go over just to protect themselves. They explained to the borrowers that they should look at the two bottommline figures I mentioned above, and that the APR was useless.

I become infuriated when browsing through sites mentioned by the author. No one is checking these sweat shop lenders advertising.

It used to be that a real estate neednt be concerned about things like APR but now they should. We mortgage brokers---the FEW left---have been saddled with new rules that can destroy escrows. Appraisal rules, GFE rules, its all just too much. Poorly worded rules by ingnorant officials will make it very hard to comply. Changes to terms can cause long closing delays now. Mtge broker and RE broker communication will be more important then ever until 2011 when mortgage brokers cease to exist, period thanks to the banks.

Nice post and interesting comments.

Nice breakdown this will be usefull to pass along to buyers shopping around. Thank you.

Jon: thanks.

Shanna, I read your post and it is good information (comment #57 for those who wish to read Sanna's post)

Janna, right on... to be effective any disclosure must crystal clear and easy to understand.

Steven, thanks and I hope it will be a useful tool.

John, I agree. Brokers who become table funders or correspondent lenders to avoid disclosing their fees are simply "weak sisters" or charging to much. That aside, I think the fact that we must disclose our profit (YSP) and banks do not is just wrong. The bogus implication is that we make extra and banks do not. But unfortunately the reality is; it seems that banks contribute more to our government officials than mortgage brokers.

Wayne, unfortunately the public trusts big box banks because they spend millions of advertising dollars, when reality is so different.

Try calling B of A, Chase, Ditech, Wells Fargo, etc. and ask for a good faith estimate of their charges without them refusing unless they first get all your personal information and ding your credit score before they will tell you how much they will charge you. The weird thing is that many consumers think that is OK. Maybe its just me and I am out of step with the world. But, I must ask what other industry would dare ask that information before they would tell the consumer the price of their goods?

Marvin, you are correct, APR stinks but we are stuck with it so the best thing to do is for us to understand it and explain it's deficiencies to our clients.

John, I think the comments are illuminating and very interesting.

Jon, thanks.

Bill,

All these accolades and yet I have to disagree. Sorry! You were doing great until your one year examples. If all loans were for only one year "APR" would be accurate and a good guide, but it's not!

APR was developed in 1971, a time when hone buyers rarely paid off a loan early, they'd buy a home live their until dying or retiring, making payments for 15, 20, or 25 years! When you keep a loan until it's fully amortized (paid off) APR was a fairly accurate estimate of cost! But, APR will always favor the higher cost lower rate loan!

Today when loans are rarerly keep more than a few years APR is often bad advice!!!!!!!!!!!!!!!!!!!

Bill

BIll another example of the misunderstood APR but one can only contend with so many contingencies so to compare and assume they will all go to term is the best that can be done. Aside from regular full fixed rates, brokers do not have the formula inf in their LOS to be able to give accurate APR. This is wahy the government requirtes ONLY BANKERS and NOT BROKERS to give it, but many states make us. Oregon is such a state, forcing many of us to break the law because we are not prepared to give accurate APR on any ARMs, fix to arm, etc.

If I could have 1 hour with a hearing panel in D.C. we could clear up almost all problems that have been around for years.

Marvin,

You're so misinformed. Reg' Z. "Truth in Lending" is Federal not state law. It applys to all consumer loans except farm loans. It's not the states choice. Brokers if they take an applaction must provied the "T in L" including "APR" and the "Good Faith Estimate" on which it's based with in 3 days! Even auto dealers offering financing have to comply.

I've been using such software since it came out even consulted on some and they all could provide APR even on ARM's! As to accuracy I can teach you to do fixed rates in an hour using most financial calculators and with an extra day I can teach you to do them for ARM's, using "IRR" on an HP-12c. Regarding accuracy, if your computer disagrees with my numbers your software needs replaced.

You say: "If I could have 1 hour with a hearing panel in D.C. we could clear up almost all problems that have been around for years." It's not the law that's the prolbem, it's the regulations written by HUD!

Numbers for a loan over 30 years make no sense if the loan is only for 1 to 5 years! Convient though it maybe it only misleads the consumer!

Bill

Thanks Bill - I have reblogged this post of yours!

SEP

2009

Very informative post Bill. I will keep this in mind as I look through the paperwork

When I had to answer specific questions about APR years ago, I decided to research it and see what exactly drove the calculation. I was amused to find that a mortgage broker coluld easily manipulate it by simply checking or unchecking the boxes next to the line items of the various types of closing costs in our Loan Origination Software, the most common being "Calyx Point."

Further, there were often disagreements within the industry as to exactly what types of costs went into the APR calculation. That's why I'm a fan of just comparing the cost of the loan from one quote to another - add up the interest and the NRCCs, and compare that to another quote - a lot simpler and a lot more accurate.

Great effort Bill.

Rick, you are correct, the best and most easily understood disclosure is an accurate GFE.

However, because so many people have been conditioned to think APR is the Gold Standard it is important that we educate what APR is an how it can be misstated.

This is really great information. . thank you for putting it togteher

This definitely helped me understand APR better - thanks!

SEP

2009

Bill: Great post and explanation on a tough subject for consumers. Very confusing to them even though it was meant to 'unconfuse' the loan costs.

I'm thinking that smart alec Janet up there thought you were writing the piece for realtors? Not so, it was geared to the public to get you more business. You've succeeded with a feature.

Fernando and Emily thank you very much.

Lyn, I am a nondiscriminatory information provider happy to give advice to anyone who will listen whether they need it or not. :)

Wow, Finally a feature after over 700 blogs.

SEP

2009

"Marvin,

Of course auto dealers and non real estate loans are covered by the fed but with some different guidelines and methods, but I dont assume you dont know that---just that you didnt elaborate on it.

Bill, Im not misinformed about any of this. It was a quickly placed post without proper elaboration, and I tend to forget that all reading are not familiar with all the rules, agencies, etc. FEDERAL LAW has always required a LENDER to comply, not state law, as you said but some states require it of brokers. Brokers are usually not classed as LENDERS unless funding their own deals. For over 20 years Ive fought that with lenders and won until they started simply demanding it or refusing to fund. Reason? So they wouldnt have to do it or if they messed up on time line they would have a copy of ours, etc. I became tired and bored fighting over it and complied.

Now you claim to be a wizard and can produce accurate figures easily on your hand held for any type of loan? You can do neg am arms? Graduated payment loans, etc? You are twice the man I am and I mean that with respect. I dont know anyone else who can.

Ive been using LOS ever since it first came out in floppy form followed by 3.5s. I was a beta testor for one of the nations current largest software companies. Are you saying all LOS systems have always been able to do APR on all the types of exotic programs in the past? That hasnt been my experience.

This went off topic though. Point is APR is flawed, misunderstood, and causes public confusion. Probably over half (Id even say 3/4) of all APRs computed by brokers over the last ten years were not correct.

Marvin, I am not sure where you are going with all but the last paragraph but there you are right on. I would put it higher than 75%.

Marvin,

This is not personal! But you're dangerously misleading people!

You ask: "You can do neg am arms?"

As a matter of fact I can, if working by the hour! The HP-12 only lets me go to 99 months, but it can be done manually! Send me a $30,000 retained against $300 an hour and I'll get started!

"Graduated payment loans, etc?" These are simple on the HP-12. At the same rate these will cost you only about $30 it would be less, but I charge by 1/10th hour (6 minutes.)

You say: "You are twice the man I am and I mean that with respect. I don't know anyone else who can." If you say so, but personally I suspect I simply had better teachers. I'm very good at math, but my spelling is outrageous. Please, don't mistake the fact that you can't do some thing with it being undoable!

I never met an LO or real estate agent I couldn't teach to do APR's in short order on most financial calculators! (I don't teach Negative Amortization!)

You won't take my word for it. That's OK, you don't work for me or know me. Would you take HUD's word? Check out: http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf

"4) Q: When does a loan originator have to issue a GFE?　

A: A loan originator must issue a GFE no later than 3 business days after the loan originator receives an application or information sufficient to complete an application. Application is defined as the submission of a borrower‘s financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the following: (1) borrower‘s name, (2) borrower‘s monthly income; (3) borrower‘s social security number to obtain a credit report; (4) property address; (5) estimate of value of the property; (6) loan amount and (7) any other information deemed necessary by the loan originator.

5) Q: What is a loan originator?
　

A: .Loan originator. means a lender or a mortgage broker."

HUD goes on: "7) Q: I am a mortgage broker. Can I provide the GFE? ."

A: Yes, a mortgage broker can provide the GFE, however the lender is ultimately responsible for ascertaining that the GFE was provided to the applicant" Perhaps this confused you. This is the reason that most wholesalers also issue a G F T in L wiht in 3 days of when they receive the application package! You can never be to careful!

Mr. Ladewig,

My apologies. Our differences are debatable, but miss leading people is bad for everyone. I felt compelled to correct Marvin and more importantly our readers, your's, mine, and Marvin's.

Bill

Marvin and Bill, interesting discussion and for the most part I agree with both of you.

I think the major point here is that two knowledge people who obviously care about doing it right disagree on APR. For any disclosure to be effective it must be easily understood by everyone especially the guys who are computing it because they must be able to clearly explain it to the consumer.

The good disclosure solution seems to be coming with the demand that GFEs finally be accurate. However, never fear, the evil doers will figure a way to game the system. And when they do I be jumping up and down screaming with pointed finger and I hope you two will join me in the fray.

Bill, APR has many faults but can be an accurate comparison between loans of the same type and amortization assuming each lender correctly entered their fees. It is not a viable comparison for different loan types or amortization periods. APR is just math which at our level is absolute. The problem with APR is that figures can lie because liars figure.

I cannot speak to Neg Am ARMs because I have never done one myself, didn't like them when they were popular and would no allow my loan officers to do them. To me the APR is immaterial because the loan stinks. Actually, the industry has stopped making Neg Ams and they will probably not be resurrected. I could write a book on how lenders stuck unwitting buyers into that piece of sh.. because they could make up to 5 points per.

SEP

2009

Bill, this is a simply way to demystify APR - the charts are easy to understand. But what I especially like is that you pointed out what the internet lenders leave out. This is very important information for consumers and for real estate agents and lenders to be aware of, since internet lenders appear to be a better value many times - but not when they don't report all the facts! I am both bookmarking and re-blogging this.

SEP

2009

In 20 some odd years in the mortgage business, this may be the best explanation and demonstration of what APR is and how it translates into dollars & cents. Outstanding post.

Marvin, I have a suggestion meant with all sincerity. If you are going to take exception with the posts of others, and offer clarification/pontification, you might want to use your spell check. Some of your points have validity, but are muted by the reader trying to figure out what some of your wording is or pertains to.And one other point if I may. When it all gets boiled down and is put to its practical use, Fed vs. state law doesn't really matter. If we must disclose it, then so be it.

Bill - Great explanation. I have been explaining APR and why the differences between lenders and on line companies for 10 years. Unfortunately like many loan originators I was never trained properly and had to do my own studying. Honesty is always the best option with your clients, if they walk away they will be back.

Thanks again for the great post!

Colleen Lynema

American Mortgage Centers, Inc.

Bill,

Your K.I.S.S. explanation is right on.. and you mention the real culprit in the problems consumers have trying to figure out the whole rate, payment, cost comparison - many companies have figured out how to manipulate the APR.

IMHO one of the big problems is that mortgage brokers, lenders, and bankers are monitored by different groups. Although APR disclosure is a federal requirement. It is usually left to the state auditors for Brokers and Lenders to determine if a company is playing fair.

I have (almost) never seen anyone agree on an APR calculation unless it was done on the same system.

Just an observation - isn't it beating a dead horse to bring a neg-am loan into the equation?

When was the last time anyone closed a neg-am transaction?

Bill, thank you for providing such a clear explanation, and the forum for all these comments which further clarify what the APR issue is about and how it can affect the buyer's bottom line.

Real estate agents who represent buyers, how much do you get into this with your buyers?

I always ask my clients if they have received a TIL from their lender, and the answer is most always "no." (So I tell them to ask the lender for one. It's more useful just explaining TIL before they talk to a lender.) My understanding is that they must have one within 3 days by law, and I do wonder why this is mostly disregarded? And since I am often asked for recommendations on a lender, then I feel that if the lender didn't provide it, it reflects poorly on my recommendation. It makes me think I should have a Q & A session with my preferred lenders before I send buyers to them, but wondering what else I might need to know...my criteria of course includes can they close on time! Has anyone run into this and what's a good way to deal with it?

Bill - excellent information, I reblogged it for our clients to read as well. Thank you for providing this - I even learned a few things!

Thank you very much for your informative APR scenario. Now, even, I understand it better, to explain to my clients. Thank you

Frank and Sharon, Internet lenders are with worst APR offenders among other things.

Pat, thank you very much for your comment.

Colleen, poor training has always been a large problem. My training consisted of "there is your territory, now go out and get loans". Good for you to have taken the extra step to get it right.

Lee, thanks for your comment. I agree the Neg Am discussion was pointess because I think they are dead as a doornail and rightly so.

Edy, questioning potential LOs about APR is a good start to selecting a LO.

Kevin and Monica, thank you for the reblog, much appreciated. The more people that understand APR, the less who will be bambozzeled

I was just having this conversation with a client. I will pass this on to him. I was telling him the same thing but you spell it out more clearly. Thanks for the effort.

I hate when clients ask this question. I usually stumble through it without the deer in headlights look from my clients but this will really help, thanks Bill!

Be Blessed!

Travis

As a loan originator and a real estate agent, I used to try and explain APR to my clients. They really either do not get it or wonder why they need to know. They just want the actual interest rate and the upfront costs. To them the aPR is useless and confusing. I have always disclosed my YSP, even when I legally did not have to do it and it pisses me off that bankers do not have to do that. It is just plain wrong to have different rules depending on where you work.

Thanks for the informative post. All mortgage brokers should make the effort to let borrowers understand these things.

I think it interesting that a couple of people here mentioned disclosing to the customer that they actually make a living doing loans. So many people - Realtors included - seem embarrassed to admit that they're doing what they do for money.

Very good explanation. It's like potato potato (pronounced differently).

SEP

2009

Bill this is one of the most difficult things in RE: Getting the right financing.

France and Mark, thanks for the comment and I am glad the blog is beneficial

Travis, thank you.

Jirius, Exactly, most buyers are primarily concerned with real numbers. I think we are stuck with the unfair disclosure because the world is ruled by bankers.

Marte, I totally agree that all lenders should allow their borrowers to know exactly their loan.

Mike, or toe ma toe

Mark, or getting the right lender but, I guess it is the same thing said differently.

APR was created by the government to help consumers shop. The biggest error is APR assumes you will have the loan for 30yrs, when the average borrowers hold a loans for less than fvie years.

Also, if the seller pays all or part of the buyer's closing costs (could also include a rate buydown cost) then the APR might be a reflection of the actual cost of the loan over the term--but not the actual cost to the buyer.

Kent, APR is only valid to compare one loan of the same type and amortization to another. And then, only if each lender correctly states their fees and uses 15 days prepaid interest APR is a good tool.

Tryone: using APR to somehow gage the actual cost of a loan would be far to difficult for the average consumer. Its only value is as a comparison as described above.

Thank you very much for this informative post. Besides trying to explain Title Insurance, APR is the most difficult thing for borrowers (and maybe a few loan originators) to understand in my book.

Thanks for all of the helpful information. I look forward to your next post! All the best!!

SEP

2009

Thanks for providing a very simple explanation for APR that clients and customers can understand. I'm reblogging for my clients too... Thanks for allowing it to be reblogged.

Thanks to "Reg Z" and the loss of YSP (if it passes) consumers will not have to worry. There will be not be much competition and consumers will not have many choices. All mortgages will have the same ticket. Thank you, again for the detailed description of APR. Continued Success!

This came up in one of my closings a couple of weeks ago and the attorney called it the Truth in Confusing instead of Truth in Lending. Your explanation is much more simplified than the attorney's legal ezs.

Judi, thank you for the reblog, it is much appreciated.

Matthew, what do you mean consumers won't have competition, gosh they will have four. B of A, Wells Fargo, Chase and Citibank. They all have a wonderful history. Thanks for the Koolaid Mr. Wells.

Tracy, a long time ago, even before I was born, attorneys met in a dark place and agreed to write everything so it could only be understood by another attorney thereby and heretofore assuring the entire clan's future prosperity.

Great information for home buyers. Most people don't understand this. I'll share with my buyer agent

SEP

2009

Bill... I write the same kind of post once a year. I cringe when I hear a realtor or loan officer state that clients should shop both GFE and APR. I disagree 110% about shopping APR just for the same reasons that you mentioned. What I loved about your blog was the examples of other major web sites that ignore certain things. Just the other day I received a GFE from a borrower, from another lender. They had 3 days of prepaid interest. Gee, their APR would be lower than mine and misleading, especially since there was no settlement date. Well done here... thanks PS... William A. though does bring up some good points in which I agree with. But I know where you were going with this...

jeff belonger

Celeste, thanks for your comment. The more public understands lending the better our industry will be.

Jeff, I appreciate your comment. I have been upset with BS sites like Bankrate for years. During the refinance boom I advertised on several with a legitimate, lockable rate/point combinations and I consistently lost business to bait and switch companies advertising unsupportable rates. When I complained the people managing the sites bought the advertisers bogus explanations.

They could not be made to understand that in the real world an advertised retail rate on a conforming conventional loan .125% to .250% below the best wholesale rate has got to be bogus.. Been on a rampage ever since.

Thanks for the feature on Mortgage.

SEP

2009

Great information. You went into much more about APR than I was aware.

Bill, as a former banker who managed lending departments when the government introduced APR calculations, you've done a nice job of traing on this subject. Thanks.

Bill, this one is worth a Bookmark! Great tutorial and explanation of how APR calculations are done. Thanks.

Interesting thing happened to me this week. We were set to prepare loan docs on a purchase deal. Found out at the last minute that an $8,500 seller credit had been negotiated. The escrow amendment had not been prepared and no one told us. The loan amount was $625,000. An $8,500 seller credit towards closing costs actually has a big effect on the APR. More than .125%, which means redisclosure under the new MDIA rules, and waiting through the 3 day recission period before the borrower can even sign docs. And I thought this type of thing wouldn't happen on my loans because I'm so accurate on my initial estimates. We were able to fix the problem by using the credit, or at least as much as we could, to cover non-APR items, which kept the APR within the .125 threshold, so no delay on docs. But now, I'm realizing how easy it would be to prepare scenarios on day 1 assuming the seller would pay some or all of the APR items, allowing a lender to show a very low APR. How about mailers advertising rates with low APR's with small print disclosures underneath mentoning a seller credit was used in the APR calculation.

APR is a joke.

I've bookmarked this to share with buyers.

SEP

2009

Bill, Thanks for a great post. I am not a great fan of APR - but I know that it is the most used comparison. Thus, I agree it is very important that as many people understand it as possible. Your post will help. I've bookmarked it and I am going to reblog it.

SEP

2009

Bill - I like your style of being educational and informative! Best of luck to ya

SEP

2009

Bill,

Very good explanation. I will share with my class when we discuss truth in lending laws.

Great post! While most of us know what APR is being able to explain it is a whole other story! This is so valuable especcially with the new MDIA rules.

OCT

2009

Great post. Now all we need to do is get a uniform understanding across all lenders of what is included and excluded!

Richard, spread the word the more people that understand APR the less people are at the mercy of the bad guys

Marie, thank you for your nice comment

Paul, it is a question of making them follow the rules; they all know the rules which are written and the same for everyone.

OCT

2009

Bill, that is a fantastic explanation in describing APR. This is something that many people truly don't understand. Dennis

OCT

2009

Hands down one of the best explanations for APR. Thanks for takng the time to share - great job Bill.

Thank you Dennis, Education is our best friend.

Josh, Thank you very much.

NOV

2009

Bill, I will reblog this post because it is a great explaination of the APR Calculations. As a Lender I know what you are saying when you use PROFIT in this Table. However Consumer Cost would be a better title in my opinion.

Rate	Fees	Points	APR	Consumer COST Profit
5.000%	$1,000	0	5.044%	$1,000
5.000%	$500	0.250	5.044%	$1,000
5.000%	$0	0.500	5.044%	$1,000

I know I am being pickly. Great post

Great post, still trying to understand it. Typically would a profit of $1,000 be normal for a $200,000 Loan? That seems low for all the hard work lenders and LO's do? I am assuming that is because it is an example.

I would think 5k,10k or more would be typical?

Tim, thanks for your comment. "Consumer Cost" would work and being picky is a way to improve.

Keith, actually the traditional fee is one point so in this example $2,000. Some loan officers try to make their monthly income by doing one loan and that mentality often gouges. Most wholesale lenders are now limiting total broker commission, including fees, to max at 3 points and a few limit it to 2.5 points.

This will vary depending on location but in California I don't care how good a loan officer claims to be, making more than $3,000 on a loan is, in my opinion, gouging.

Bill,

This is a very well written piece, and APR is one of the most misunderstood pieces of the loan process. However, I'm afraid the average buyer is never really going to understand, and "go with the lowest rate."

This is very well explained and buyers need to understand this. Definitely worth a feature.

This is great Bill - thank you very much. I will keep this handy for my buyers. This is very concise and easy to understand. You are truly the "Guru" in my book.

NOV

2009

Ron, you may be correct but we must continue trying to educate.

Wayne, thank you for your comment, I agree :o)

Dan, thank you very much your comment is appreciated.

Nice post w/ good information for sure.... Thanks for explaining it for us today at AR

Patricia/Seacoast NH

I was just about to report this post fro being duplicate content, because I know i have seen this exact post before. Turns out this dummy is not to quick on the uptake. Luckily I read the replies and saw myself on

Patricia, thank you for sure.

Daniel, thanks for not turning me in. :o)

The previous title was What is Apr - Can You Explain it. I added "Mortgage" to improve it's SEO, I hope

NOV

2009

Who say's accountants have no personality... Thank's for the hard data Bill. We all need a periodic refresher course in the mysteries of compound interest, amortization tables, and the many ways that there are to work the system..

Great Info to post for sure. Most people do not understand APR and need too. It can cost you thousand more than what you thought!

That is a good job explaining APR. A bookmark for sure.

What is sad, is that you have to show others in the industry practices of others to explain the differences. That can cloud the perceptions of the entire industry. So much bait and switch type practices the consumers need to educate themselve more and more.

Bill I posted a few weeks ago on the misuse and miscalculations of APR as a selling feature, as I noticed on a BIG bank's website (One of my prospects was shopping me). In my situation, there was over 2 points in "difference" (ghost fees?) that I had to work in to get my APR the same as theirs. APR can really hurt people some times. And 99% of consumers have no idea unless we explain it.

Bill, one of the most informational blogs I have seen in a spell. You really break it down for both the Realtor and the consumer. Thank you much.

NOV

2009

Bill, thank you for this informative post that really helps us and our clients explain what APR really means!

NOV

2009

Thanks Bill, of course I liked it so much I reposted it. It answers quite a few questions and makes for a good read.

NOV

2009

Thanks for the excellent explanation. The use of the charts is helpful and I am sure would benefit customers.

NOV

2009

Bill, thank you for your fabulous post in explaining something I had not 100% understood...I'm re-blogging this! :)

Leilani

Bill, thanks for such a thorough explanation. I got a call last week from a past client, who wanted to refinance. He told me it wasn't going to cost him anything. I told him yes it was, lenders don't work for free.

Send me the good faith so I can look at it.

He found out yes he was paying something to refinance.

Andrew, who says I am an accountant?

Laura, Education is protection. The more consumers know about APR and the process in general, everyone wins except the bad guys.

Mark, our industry, with a few exceptions, has a very poor training record. Most loan officers can't explain APR or even a basis point.

Steve, I am continually pissed about lenders who advertise a really low rate without disclosing points. There is nothing wrong with using points to buy down the rate but because most consumers don't understand APR it is misleading to advertise a low rate without also disclosing points.

Tim and Pam, thank you very much for your compliment.

Susan, thank you, mortgage APR education is our best friend

Charles, thanks again for the reblog. It is one of the nicest compliments.

Guy, glad the APR explaination is helpful. It took me a while to figure out how to show the charts.

Leilani, thank you and thank you for the reblog as I said to Charles, a reblog is the best compliment.

Missy, good work, agents should always ask to see the GFE to protect their clients. Understanding mortgage APR is important but because APR is so often misstated, a accurate GFE is the best disclosure. The next step is for agents to understand which fees are missing, if any.

What a great post. Thanks for sharing. I would like to ass that in my Buyers package. It is a good thing to give them along with your Agency Disclosure.

NOV

2009

Bill

As always, I enjoy reading your commentary. APR is very misleading as most lenders Play with the numbers and items they choose to disclose as APR items.

An extremely large company where I was in in the late 90's even had a L/O Class on it while bragging the corporate staff attorneys made recommendations based on interpretation on what needed to be disclosed.

Pretty Unbelievable.

Happy Thanksgiving.

JAN

2010

Bill , I have been learning from you daily before I started playing in the rain by reading your daily newsletter. Great to have you accessible in AR. Thanks for all the education. We will only become better loan officers by "getting it right" and I look to you for the right info. Thanks a ton!!

Lori, thank you for your nice words and congratualations on being "Citizen of the Year"

JAN

2010

Hi Bill!

Great info! I am overseas. Been out of the business for a while, but hope to utilize your educational posts someday.

Take care, Rich

Hey Rich, welcome back, glad to hear from you again.

I enjoy posts on the mortgage industry. I have always found that loan officers make up a definition for APR when it is simple and is not something you should hide from. The customer needs to be presented the information, so they can see what it is costing them to get that Note Rate they want so bad. Good post.

Bill,

Thank you for the plain English explanation of APR.

Bill, would you mind sharing the realtor script you mentioned in one of your comments? I am a new agent, and the more I can learn the better!

Thank you for sharing this information.

Anna

What a great post! I am going to bookmark this post for buyers who ask for an explanation.

Bill, a great post. Thanks for taking the time.

Boy am I glad our banking system is different than your banking system.

Good stuff Bill. All this can be confusing for the consumer.

JAN

2010

Bill,

Are you paying all the above people to say those things about you?

I am a Mortgage Broker in GA and I have recently teamed up with Realtors who do a very professional job, are very experienced and will reabte back at closing to pay for all my borrower's closing costs.

These Realtors are glad to receive approved referrals from the Mortgage Girl of all people. (what a switch, right?)

My feelings are that realtor commissions have gotten way out of hand and for a Buyer's Agent to sell a home for $400,000 and take $12,000 is simply rediculious! Look at these commissions that Buyer's Agents receive!

$300,000 @ 3% = $9,000

$400,000 @ 3% = $12,000

$500,000 @ 3% = $15,000

$600,000 @ 3% = $18,000

$700,000 @ 3% = $21,000

$800,000 @ 3% = $24,000

$900,000 @ 3% = $27,000

$1,000,000 @ 3% = $30,000

When my buyer can go to Realtor.com, GPS or Map Quest properties to do a drive by in advance to narrow down the choices and have a Realtor write a contract, I can't allow my borrowers to just give away so much of their equity. After all, we all know that selling a buyer a home is not like proforming reconstructive facial surgery now is it?

Realtors deserve to make a fair fee for the job, not make enough to buy a new car for something so simple to do.

Sandy

Kyle, Thanks for your comment

Connie, thanks we try da spikka de engish.

Anne, I am not sure which script you are referring to.

Sharon, thank you.

Ted, thank you.

Clark, that is because the Canadian government is not owned by US Banks

Thanks Wayne.

Sandy, yes and darn, I just ran out of money :0)

JAN

2010

Will the new laws with the more detailed explantions and easier means of comparison for consumers reveal these costs above... in your opinion?

You made this easy to read...easy to understand. Thanks.

Cheryl, unfortunately the new laws (GFE 2010) provide an even more confusing disclosure.

Don, thanks for your comment.

FEB

2010

Bill -excellent. Not only it is a great feature but probably one of the most re-blogged posts around here. I too will reblog. Superb! ~Rita

Hi Rita, thank you for the reblog, it is appreciated.

MAY

2010

GFE 2010 just made it even EASIER to charge clients MORE due to the complicated nature of the beast!

JUL

2010

I think this is a terrible explanation of APR. You are using such unrealistic numbers creating situations that people don't ever see. Perhaps if you were to use realistic numbers it would be better. However, I still think you were VERY wordy and therefore confusing.

I am sorry that I came in here and said those mean things. If I could delete the post above me I would. I respect that you have given your time on here to explain this confusing thing to consumers and realtors alike. I hope you can forgive me.

Hi Johnny, In my opinion the 2010 GFE is the worst disclosure ever and you are correct it confuses everyone and even after months in use not all lenders agree on its preparation.

Tom, thanks for your opinion and retraction. There is no forgiveness required. We can learn from everyone's point of view.

SEP

2010

Wow, its been a long time since I visited this site. Not sure if anyone cares by now---lol. I closed my mortgage company months ago to go back to my real estate roots.

Just have to say two things based on the posts from my last visit--- one of you said my spelling was bad enough to make it difficult to understand my 'pontification'. You recommended a spellchecker. At the time, friend, I was using a voice typing software while speaking from a hosiptal bed. After review tonight, I dont find my spelling or structure to have detracted from anything said. Where the hell did you get that, anyway?

The second is what I said about the BROKER not being required to do APR. They were not. Period. It was up to the lender. I took many wholesale lenders to task over this and won until they finally said 'We know, we dont care, do it anyway'.I dont know about current rues because I (thank God) am out of the industry.

Personal stuff aside, I think we could agree that APR shouldnt even be used. I used to post in large public mortgage broker forums such as Mortgage Grapevine. For fun Id ask what is included in APR? Which fees? I never had a single consensus. Never. Reading the mortgage rules a joke. The books are about 1/6 rule and 5/6 atty opinion letters.

SEP

2010

Hi Marvin,

Sorry that you had to spend time in a hospital, it is never any fun. You are absolutely correct about how APR is misunderstood by most everyone. It was a good idea gone wrong,

Best of luck with your real estate business.

Best wishes, Bill Ladewig

AUG

Great post. I enjoyed all of the comments. Very informative.

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Bill Ladewig Your FHA Guru - FHA and VA Loans Since 1970

Escondido, CA

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