OK, I went to college, took algebra, geometry, trigonometry, calculus, statistics, and passed them all. Math wasn’t a problem for me (history and literature were), alas, I’m pretty baffled at how broker/bankers, and lenders come up with a mortgages Annual Percentage Rate (APR).
This is a problem because APR is commonly referred to as the ‘value comparison barometer’ when shopping for a mortgage.
I feel like my 5th grade teacher telling his students to ’show me the math that goes along with your answer’ when a mortgage professional simply says ‘well it seems about right’. WTF? It seems about right?
During a common mortgage qualification process, you’ll often find 3 different APR’s:
- Generated by the ‘in house’ broker/banker generated Truth In Lending doc
- Mailed from the funding lender
- At the time of closing.
What’s more frustrating, is asking them to tell you how they came up with that APR, and you get a bunch of ‘uhhh’s’, calculator button punching, or baffle ‘em with bullsh*^ talk.
Determining APR is more creative art than science. Depending on the individual broker/banker, with so many independent variables can be adjusted in the APR formula, it’s worthless at best and misleading at worst. It’s very common to give two lenders the exact same data for the exact same loan and come up with two different APR’s. Some lenders count certain closing costs as part of the APR, some don’t- There is NO prescribed method, only ’suggested’ formats.
Nobody can seem to, “Show Me The Math!” Why?
Mortgage pro’s, please don’t reply with a tutorial in how APR’s should be or are determined, you’re limited to the software program you’ve been provided with.
The actual equation looks like this:
LA – F = P1/(1 + i) + P2/(1 + i)2 +… (Pn + Bn)/(1 + i)n
i = IRR
LA = Loan Amount
F = All other fees (Points, lender, attorney, appraisal, etc)
P = Monthly payment
n = Month when the balance is paid in full
Bn = Balance in month n
Don’t bother getting out a pen and paper to solve your APR, it must be done by a computer or proper calculator, unless you’ve got a few days to spare and/or are a graduate level mathematician. In other words, any mortgage pro who says the APR is THE number to consider when comparing like mortgages without disclosing how they determine it, is blowing smoke.
Citing Wikipedia for those who think I’m just being sensational:
- Regulators have been unable to completely define which one-time fees must be included and which excluded from the calculation. This leaves the lender with some discretion to determine which fees will be included (or not) in the calculation.
- Leaving discretion to the lenders opens the doors to misinformation and manipulation towards the consumer.
What is a borrower to do?
- Ask what the wholesale PAR rate is on the loan(s) you qualify for. (Prepare for the runaround here)
- Ask how much in YSP the broker or banker is receiving. If you are dealing with a banker, they will almost without fail tell you they aren’t receiving any, or that bankers don’t receive YSP (in general). If you’re dealing with say Countrywide’s retail division, the mortgage professional you’re speaking with may not actually be receiving any direct compensation from YSP’s (they’re typically bonused on the amount of volume they produce) but that doesn’t mean they’re not selling you a higher rate than PAR. Don’t forget, that Bankers do not have to disclose YSP, so be extra careful.
- Ask for an accurate accounting of ALL closing costs associated with closing the loan and add them up.
- Compare the PAR rate to the aggregate total of all closing costs….this will give you a clearer picture when comparing mortgages while shopping.
Also See:
Tutorial on APR (Jack Guttentag)
