2004 September 16 | Wheatworks Blog: Financial Matters

Archive for 16th September 2004

‘Free APR Calculator’ Available from Wheatworks.com

9/16/2004, 4:00 pm

Wheatworks is happy to release a significant update to “Free APR Calculator“. This APR calculator is designed to help you calculate the APR of a home loan. It’s available for you to download from http://www.wheatworks.com/freeaprcalculator.htm. Enjoy!

But, wait … “What’s an APR?” you ask.

APR, or “Annual Percentage Rate” is one of those numbers that many see and few consider. If you read the advertising of financial institutions and car dealers in your local paper or visit the web sites of loan companies you’ll see interest rates and APRs. Pay close attention to the APR.

Most are aware the Interest Rate is a percentage of a loan which is paid to the lender for the privilege of borrowing money. If you borrow $100,000 at 7% for 30 years you’ll pay back your loan plus 7% of your loan’s current balance each year. That’s good to know.

But the APR is more important. APR is the number that tells you what you’ll ‘really’ pay in interest PLUS all the other costs involved in borrowing money to purchase a home. The Annual Percentage Rate accounts for costs like points, prepaid interest, origination fees, mortgage insurance premiums, flood check fees, etc. And these can add up quickly. The APR tells you the cost of a loan when all of the extra fees are thrown into the mix and added to the equation.

While many ignore the APR and focus on the Interest Rate, this can be costly when choosing among different loans. Loans that look alike can be very different. Comparing Annual Interest Rates is the best way to choose.

If you compare two loans for the same amount which have the same interest rate, the loan with the lower APR will actually cost less.

Consider this example:

You visit Bank “A” and ask for $100,000 to buy a house. Your friend visits Bank “B” and makes the same request. Both of you are approved for $100,000 at 7% for 30 years.

Congratulations! You and your friend should celebrate!

But who got the better deal? Comparing interest rates won’t answer that question. Comparing APRs will.

If your bank, Bank “A”, requires you to pay $1,500 in points and (all other things being equal) your friend’s bank, Bank “B”, doesn’t require points, your friend got the better deal. In fact, your friend kept $1,500 you didn’t keep. (It pays to shop around!) And even though you both got a $100,000 loan at 7% for 30 years, your friend’s better deal is reflected in a lower APR.

Remember, comparing APRs is the best way to compare the actual cost of different loans. When you shop for money, pay attention to the APR. It’s the important number.

It’s so important that Federal law tells lenders exactly how to calculate a loan’s APR. The precise method is defined in Appendix J of 12 CFR Ch. II, Pt. 226, the portion of the United States Code of Federal Regulations known as “Regulation Z”.

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