APR is calculated by taking the amount of the loan minus the finance charges to determine the amount financed. Then the APR is calculated using the actual payments for principal, interest and mortgage insurance on a loan amount that has been adjusted to equal the amount financed.

Here is an example...

$200,000 loan amount at 6.5% fixed and $5,000 in closing costs. The P&I payment is $1264.14.

$200,000 loan amount minus $5000 closing costs equals $195,000 amount financed.

A loan of $195,000 with a P&I payment of $1264.14 equals an interest rate or APR of 6.758%. However, the APR is really one accurate if all 360 payments are made as scheduled.

Something more alone the lines of a 3-5 year APR calculation is a more likely reality for most our customers and right now it could be argued that a 1-2 year APR is a more likely scenario if interest rates decline as expected in the near future and the loans we make no are refinanced sooner rather than later.

Tomorrow we will look at how to calculate an APR based on a shorter time frame and show your customers the real way to save some money in this market.