Calculation of an Annual Percentage Rate (APR)
Calculation of an Annual Percentage Rate (APR)
Calculation of the annual percentage rate (APR) on a mortgage loan is a calculation and disclosure required to be made by all mortgage lenders on 1-4 unit residential property loans. It is mandated by the federal Truth in Lending Act (TILA) (Reg Z).
It is not the note or contract rate that the borrower will be paying, but instead is designed to reflect the true cost of credit and was created in 1968 to allow borrower to shop and compare different mortgage loan proposals.
The following example uses a $240,000 loan at 6.5% in a 30 year fixed loan:
1. Calculate the monthly payment on the loan. The principal and interest payment is $1,516.96.
2. Subtract from the loan amount all prepaid finance charges (PFC). A closing cost is a PFC item if it is being collected and retained by the lender on or before closing. For example PFC items would include loan origination fees, underwriting fees, doc prep charges, discount points and prepaid interest, but not include title fees, recording fees, appraisal and credit report fees. These are items being paid to 3rd parties and not retained by the lender.
$240,000 – Loan Amount
- 2,400 – 1% Origination Fee
- $400 – Underwriting Fee
- $20 – Application Fee
- $875 – Prepaid Interest
- $200 – Processing Fee
$236,105 – Amount Financed
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3. Calculate the APR by entering into your financial calculator $236,105 as the loan amount or present value, us a monthly payment of $1,516.96 and a 30 year term. Solve for the interest rate.
4. 6.66% is the APR on this loan.
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