What's My Rate?

Why is my APR 5% when you said I was getting a 4.625% interest rate on my loan? this is one of the most common questions we get on a mortgage when folks review their Disclosure Forms. I want to shed some light on this situation for you. I came across this post on Activerain the other day and thought it would be helpful for you all. I'm not too proud to shared great work from other lenders around the country so please take a minute and read what George Souto has written on the topic. If you still have questions on the subject please leave a comment and we will open up a discussion here.

And keep in mind, if you are comparing several lenders the greater the difference between the APR and the interest rate, the more expensive your loan is. So don't just go out and pick a lender based on the quoted rate.

ORIGINAL CONTENT BY GEORGE SOUTO NMLS #65149

One of the most frequently asked questions I get from Borrowers when we go over the Truth In Lending Statement is Why Is The Annual Percentage Rate (APR) Higher Than The Interest Rate?  The (APR) is probably the most misunderstood and confusing elements in the loan process. 

The APR is not only confusing and misunderstood by Borrowers, it is also confusing and misunderstood by Loan Originators as well.  If you doubt that, just ask the next Loan Originator you speak to, to explain what the APR is, and what fees go into the APR calculation?  The odds are most Loan Originators are not going to be able to provide a good answer, or will most likely give a very vague one.  So if those who make a living originating loans have a difficult time explaining how the APR is arrived at, how can anyone expect a Borrower to understand it?

Let's first make one thing very clear, the APR is NOT an interest rate.  The interest rate is the rate which makes up the interest portion of a mortgage payment.  As oppose to the APR which is simply a calculation that is expressed as a percentage (%) which is suppose to reflects the Lender Fees in a loan.  The purpose of this figure (APR) is to give a Borrower a quick and easy way to determine which Lender has the higher fees.  So if two Lenders have the same interest rate for the same loan product, the Lender with the higher APR has the higher Lender Fees.

That in a nutshell is all the APR is meant to be.  If those reading this blog remember nothing else, please remember this:

• The APR is NOT an Interest Rate
• The APR IS is a percentage which reflects costs
• The intent of the APR is for Shopping Purposes

It is interesting how the APR percentage is arrived at.  The government takes the base loan amount and subtracts the fees which make up the APR from it.  So if the base loan amount is reduced, but the monthly principle and interest figure remains the same, the result in a higher percentage which reflects the Lender Fees.

The most common Fees that go into the APR are:

• Points
• Processing Fee
• Underwriting Fee
• Closing Fee
• Application Fee
• Appraisal Review Fee
• Lender Inspection Fee
• Wire Transfer Fee
• Flood Certification Fee
• Broker Fee

All these are not charged by all Lender, generally a combination of these fees are what is charged and they vary from Lender to Lender.  But these are among the fees most commonly charged which make up the APR.  The important thing to remember is that any fee which is Lender related is part of the APR.

Fees that are NOT part of the APR are:

• Title Fee
• Attorney Fee
• Recording Fee
• Credit Report Fee
• Appraisal Fee
• Notary Fee
• Home Inspection Fee
• Taxes
• Homeowners Insurance
• Re-Inspection Fees 

I hope the above explanation has made it easier to understand Why The Annual Percentage Rate (APR) Is Higher Than The Interest Rate?

Note:

One more thing, a Lender is required to state the APR every time the Lender quotes an interest verbally or in writing. 

- See more at: http://activerain.com/blogsview/4310538/why-is-the-annual-percentage-rate-apr-higher-than-the-interest-rate-#sthash.5B9eBkXL.dpuf

As always, please make comments below with any questions you may have on this topic or other lending and real estate related topics. Thanks for stopping by.

It's a new year...In case you hadn't noticed

To get this year kicked into high gear, we are putting on a special free event. You have plenty of time to get it on your calendar so please save the date now!

This is for our realtor partners around El Paso so if you aren't in real estate you can ignore this one.

Lunch is provided and a happy hour mixer after the presentation. Please let me know if you can make it and invite your real estate partners and associates.

Let's make 2014 the best sales year ever for you!

A huge thanks to our sponsoring partners: 

Christina Dominguez, First American Home Warranty
Vianey Martinez, Premier Insurance Services
Steve Raney, Texas Title

QM Rules Continued

As promised I am continuing to provide insights on the QM Rule changes that are coming next week. The good news is, it won't affect a lot of our clients who use Government backed loans such as VA or FHA.

In my research I found a really good, short and to the point post from another professional. I am going to share her post and give you a link to her site. I don't usually like to promote competitors sites but I think she did a really great job of simplifying the issue for us.

Here is what she posted on December 18th.

Qualified Mortgage Rule Changes – What You Need to Know

By: Selene Garcia

There has been a lot of news surrounding the latest mortgage rules (often referred to as “Qualified Mortgages” or “QM,”) which will be implemented January 10, 2014. These new rules, instituted by the Consumer Financial Protection Bureau (CFPB), are designed to protect you and hold lenders legally responsible for the loans they approve.

As a bit of background, the CFPB was established in 2010 as part of the Dodd-Frank Act; the financial reform bill passed and signed into law in the wake of the financial crisis. The Act itself protects consumers from deceptive practices in the financial and banking industries, including excessive fees and bait and switch tactics.

The CFPB’s job is to ensure federal consumer-related financial laws are executed. Some of the CFPB’s responsibilities include: drafting rules; overseeing financial institutions; sanctioning federal consumer protection laws; observing financial markets for inequitable consumer risks; bolstering consumer financial education; and examining consumer trends.

The most recent CFPB provisions governing mortgages, the Ability to Repay (ATR) and Qualified Mortgage (QM) rules, ensure that:

• Consumers are able to repay the loan for which they’ve applied:  If you’ve applied for a mortgage any time after 2008, you’ve likely noticed the increase in paperwork requested by your lender. Thefinancial documents requested are part of the “Ability to Repay” rule which states that every lender must take steps to confirm that consumers can reasonably repay the loan.

• Consumers will be qualified using 43 percent gross income versus 45 percent for non-agency and non-government loans: Debt-to-income ratios are used to qualify consumers for a mortgage – this percentage tells the lender whether or not you can afford the loan. The new requirement of 43 percent is a small change and equates to a minimal monthly payment difference. Let’s look at the math: using pre-tax monthly income of $50,000 per year and assuming no other major monthly debts, the maximum monthly mortgage payment (including taxes, insurance, assessments, and mortgage insurance) allowed under the qualified mortgage rules will drop from $1,874 to $1,791, or $83 per month. For most buyers, this means the total size of the loan they will qualify for under the new rules will be reduced by several thousand dollars.  

• Consumers are not being offered risky loans:  While there aren’t as many risky loan programs available today as in the past, the CFPB classifies some mortgages that include features such as: balloon-payments, interest-only, negative-amortization, and loan terms of more than 30 years amortization as “risky.”

• Consumers are not charged exorbitant fees:  The CFPB considers fees exorbitant when they exceed 3 percent of the loan amount for any loan over $100,000. For loans under $100,000 the percentage threshold is adjusted, as reasonable loan fees may surpass the 3 percent requirement for smaller loan amounts.

Moving forward, lenders will carry greater legal liability for those loans closed outside of the ATR/QM rules. Additionally, those loans which fall outside of the QM guidelines may become difficult to sell on the secondary market to lenders such as Fannie Mae and Freddie Mac. Ultimately, the new rules hold lenders legally responsible for ensuring consumers can afford their purchase and as a consequence, mitigating the risk of default.

Loans which fall outside of the QM requirements such as jumbo loans or loans which offer risky features like negative amortization or interest only options are not backed by Fannie Mae or Freddie Mac, and thus will need to be held in a lender’s portfolio.

There are several real estate-related loan types that will not be subject to the new ATR/QM rules, including:

• Second mortgages;
• Time share plans;
• Reverse mortgages;
• Bridge loans with less than 12 month terms; and
• Credit transactions secured by vacant land.

Some home buyers have expressed concern that the new rules will limit the ability to buy a house or choose a lender, but chances are you won’t notice the difference. Most of the loans made today—indeed, most loans made since the financial crisis—have not fallen far beyond the current QM rules. Some lenders will still continue to offer loans that do not meet the QM guidelines; however, it will likely require more documentation on the part of the buyer, since the lender will be taking on additional legal responsibility.

If you are currently shopping for a mortgage, or plan on purchasing a home in the near future, contact a mortgage professional to discuss the impact of the recent rules and how they might affect you.  

More information is available on the Consumer Financial Protection Bureau website. 

There is a ton of information on this subject and I will continue to look for simple explanations to help bring clarity to the matter.