Interest rates are up but my bank's rates look low

[linazelle]

My bank is ABNAMRO, here are their rates:

30 Year Fixed 6.000% (rate) 6.133% (APR) $1,127.15 $2,188.51

15 Year Fixed 5.500% (rate) 5.770% (APR) $1,536.12 $2,826.20

5/1 Interest Only ARM (LIBOR Index) 5.500% (rate) 6.580% (APR) $ 861.67 $2,900.84

5/1 ARM (LIBOR Index) 5.500% (rate) 6.571% (APR) $1,067.44 $2,838.99

3/1 ARM (LIBOR Index) 5.375% (rate) 6.745% (APR) $1,052.75 $2,798.00


Question:

Why isn't the refi- market still booming with rates this low?

Please explain the APR to me--in plan English, there is a big gap between some of the rates and the APR--how is that?

[kcass1954]

1. The interest rate they quote you is the rate on the note.

The APR is the annual percentage rate; it's calculated on the assumption that you'll keep the loan for the entire term. It includes items legally defined by Reg Z to be "prepaid interest charges" - i.e., prepaid interest, points, origination fees, and some of the "junk fees" that lenders throw in.

Every lender has to use the same formula to calculate the APR. This enables you to compare loans between different lenders, or even different loan programs from the same lender. You can see if Bank A's loan (30 yrs, 6% w/ no points) is a better deal than Bank B's loan (30 years, 5.25% w/ 3 points).

[linazelle]

3. Ok, the comparison part I understand....but

this didn't totally explain it for me.

What increases the APR above the interest rate? Fees? Points? Would the fees for the loan be included in the APR too to drive it up?

Looking at ABN Amro's 3/1 ARM, the APR is highest of all of the quotes--is that because it's amortized over a shorter, 3-year period
:shrug: thus driving the APR up?

[OPERATIONMINDCRIME]

4. Yes. APR Includes All Fees And Points. Always Sort A List By APR.

[kcass1954]

6. The Truth-in-Lending Disclosure provided by the lender shows an amount

called "Finance Charges". This is the interest you'll pay over the life of the loan, but it also includes the so-called junk fees - tax service, underwriting fee, processing fee, private mortgage insurance, document prep fee, application fee, and maybe others that I can't remember right now. (I was an underwriter in a prior life.)

Before the APR is calculated, these items are all added to the total amount of interest you will pay on the loan. Because these items are legally defined as "finance charges", the total amount of "finance charges" is increased. Because the "finance charges" are increased, the APR is higher than the interest rate stated in the note.

Lenders are required to give you this disclosure within 3 days of your mortgage application, along with a load of other disclosures. This initial disclosure is an estimate, based on the loan terms requested and the anticipated closing costs. You also get one at closing which is based on the actual loan terms and fees.

In Florida, if the initial disclosure is not provided, this can be the basis of the borrower's defense in any foreclosure action.

When I was an underwriter, my predecessor allowed the doc prep company to complete the final TIL. That company didn't fully understand how to calculate the APR on adjustable mortgages, and underestimated the APR's on about 50 or so mortgages. When the feds came in for our annual examination, this error was discovered. We were required to adjust interest rates for these customers, and in some cases, refund money to them.

[sonsera]

2. APR Rates

Annual Percentage Rates are the effective rate you will recieve over a period of one year. If a fixed rate is 6 % on a Savings account you will receive more than 6% in a years time because the interest may be compounded monthly or daily as opposed to yearly.

[sonsera]

5. The Mysterious APR

In my first reply I inadvertantly thought you were referring to Bank Savings Accts. My mistake. Sorry. Here is a brief explanation from “Real Estate & Mortgage Insights” found at: http://www.realestateabc.com/insights/apr.htm
This article explains it much better than I could.

When you see a real estate advertisement that quotes a payment amount, it also must include a number called the APR. That stands for "annual percentage rate."

When you apply for a mortgage, the lender is supposed to mail you a "good faith estimate" and a "truth in lending statement" within three business days. The note rate is quoted, along with the APR.
The APR is always higher than the note rate you are quoted. Why?

Partly because APR is a totally artificial number. It is not the note rate on the loan and does not determine your monthly payment. It is calculated according to a formula determined by the government and is supposed to provide a method for comparing one mortgage offer against another, even when the rates, points, and costs differ.

The APR is supposed to help you determine your "true cost" of borrowing.
What follows is a simplification of how the APR is calculated:

The lender totals up certain specific costs associated with the loan and the interest rate that was quoted to you. Those costs are subtracted from the loan amount you inquired about. That results in a figure lower than your loan amount. Then the payment for your loan is calculated "as if" it were the payment on that lower amount.

As a result, the APR is always higher than the note rate you are quoted. The only exception is when the lender pays for all of your costs, which is often referred to as a "no cost" loan. There really are costs -- the lender is just paying them for you.

Keep in mind that the explanation above is a simplification. Computers are used to actually calculate the APR. Loan officers do not sit down with a pencil and paper and figure it out, even using a calculator.
There is some guesswork involved. For example, adjustable mortgages have an APR, too -- but no one really knows what rates will do in the future. Also, no lender really knows all the costs until the loan actually closes (a subject for a future column) - that is why the Good Faith Estimate is called an estimate. Since costs affect the APR, it cannot be accurately quoted until the end of the process.

Even then, it is still a fictional number.

A loan with a lower interest rate and higher points could easily have a higher APR than a loan quote at a higher note rate and lower costs, but... ...your "true cost" of borrowing may depend more on how long you keep the loan than anything else. Paying more in points to get a lower interest rate may save you more money if you intend to remain in the property for a long time -- even though it has a higher APR.If you are more confused about APR than when you started reading this column, don't worry.
You're in good company.