How do I calculate APR·

Posted By: Dr. Frugal in Loans on 09/12/2007 at 20:28:36

Despite the best intentions of the Truth in Lending Act, the way lenders quote APR is not completely straight-forward. Calculating the APR for a loan, especially mortgages, is so complicated that specialized software is required, and even then many people in the business don't understand what to include or exclude. APR is supposed to include all the costs of the loan, so fees and expenses should be added to the borrowed amount--or should they· Many financial experts have real problems with using APR when comparing mortgage loans because of the outside expenses and fees that may or may not be included in the calculations. You can't assume that two different financial institutions use the same assumptions to calculate the APR of competing products.

The usefulness of the APR is not universally accepted among financial professionals for all loans. Here are some of the negative comments about using APR to choose a mortgage loan:

. Not all fees are included in calculating the APR, so it is distorted.

. There is no weight given to the tax consequences of the decision, especially if a lender is offering a lower rate, but higher fees.

. The APR includes fees and expenses over the life of the loan. For example, a 30-year mortgage is assumed to never be paid off early or refinanced, so all included charges are amortized over 30 years. The problem with this thinking is that very few mortgages run their length without some change.


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