Jul. 13, 2007: Mortgages: just what is the “APR”? and a quick joke

Jul. 13, 2007: Mortgages: just what is the “APR”? and a quick joke Rob Chrisman

The Annual Percentage Rate is an expression of the effective interest rate that will be paid on a loan (i.e., “true cost”) taking into account one-time fees and standardizing the way the rate is expressed. In theory the APR is the total cost of credit to the consumer, expressed as an annual percentage of the amount of credit granted. APR is intended to make it easier to compare lenders and loan options. The APR is likely to differ from the “note rate” or “headline rate” advertised by the lender. Consumers can use the APR concept to compare savings accounts and calculate the earnings on a savings account, taking transaction costs into account, but it doesn’t affect their monthly payments. (These are a function of the interest rate and the length of the loan.) The fees most often included in the APR are points (both discount points and origination), pre-paid interest, the loan processing fee, underwriting fee, doc-prep fee, and mortgage insurance. Sometimes a loan application fee or credit life insurance fee is included. Fees usually not included are the title or abstract fee, escrow fee, attorney fee, notary fee, home inspection fees, recording fee, transfer taxes, credit report, and appraisal fee. A borrower attempting to compare a 30-year loan with a 15-year loan using their respective APRs may run into trouble, as a 15-year loan may have a lower interest rate but could have a higher APR since the loan fees are amortized over a shorter period of time.

This morning’s news was slighter weaker than expected, although with the DOW at another all-time high it will be tough to convince anyone that interest rates should be lower to promote a slow economy! Retail Sales came out -.9%, ex-auto -.4%, much weaker than the -.1% expected. Import Prices for June were +1.0%, mainly due to an increase in oil, following an increase of 1.1% in May. Export Prices were +.3%. So although we had a weak Retail Sales number, these price-level numbers indicate that inflation is still an issue. Through it all, the yield on the 10-yr did not do much, and is still hovering around 5.11%.

When Bob found out he was going to inherit a fortune when his sickly father died, he decided he needed a woman to enjoy it with. So one evening he went to a singles bar where he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away. “I may look like just an ordinary man,” he said as he walked up to her, “but in just a week or two my father will die, and I’ll inherit 20 million dollars.” Impressed, the woman went home with him that evening. Three days later, she became his stepmother.