How can 4.75% fixed 10 year mortgage be 5.497 APR% ??

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I do not understand how we can be quoted 4.75% 10 year fixed rate for our investment property, and then the APR% is 5.497?

Googling interest rates, I find nothing comparable to 4.75% with 5.497% APR???

gmakerley · Posted: Thu Feb 04, 2010 10:29 am Post subject:

muffy, you are obviously being charged point(s), and other fees that are considered "prepaid finance charges." such have a major impact on your apr - review your good faith estimate and be sure that the prepaid finance charges are clear to you - they will definitely be spelled out.

apr is an actuarial calculation that most of us will never understand, but you would, hopefully, be able to compare this one favorably with others. if your lender's apr is substantially higher than others who might offer you such a deal, then you will probably want to consider taking your business to the "others."

bg0427 · Posted: Thu Feb 04, 2010 11:52 am Post subject:

That is probably some kind of discount points. 4.75% on a 10 year term for an investment property is still pretty low. The difference between a 10 year and 15 year isn't too much in rate and it being an investment usually has some hits added to it.

bg0427 · Posted: Thu Feb 04, 2010 12:37 pm Post subject:

I just ran the numbers through and actually 4.75% is a good deal the broker or lender should be getting about 1.3% on the backend so if he is charging more than half a point origination tell him to drop it down he probably will.

jveenstra · Posted: Thu Feb 04, 2010 1:30 pm Post subject: APR

APRs on ARMs is very confusing. Often done incorrectly and often incorrect in newspaper advertisements.

The APR is calculated based on the index and the margin the day it is issued. If the index and the margin total 6.500% (just making up a number because I do not know your index and margin), that means the APR is calculated at ten years at 4.75% and 20 years at 6.500%. that plus other fees included in the APR can make your APR high. Ten years from now, if the index dropped (the margin always stays the same), the rate could go to 4.75% or more or less. It may never go to 6.500%, but, that is how the APR is calculated for the ARM.

Pay more attenetion to the index and the margin. Yoiu may have zero points but an excessive margin.

The way the ARM APR is calculated is the same reason an ARM APR can be lower than the start rate sometimes.

The lender may or may not be charging any points. We can not tell becasue we do not know the index and the margin.

bg0427 · Posted: Thu Feb 04, 2010 1:53 pm Post subject:

John,

They stated that this is for a ten year fixed rate not an arm.

jveenstra · Posted: Thu Feb 04, 2010 2:12 pm Post subject: APR

OOPS

Thanks for the correction

jveenstra · Posted: Thu Feb 04, 2010 2:19 pm Post subject: APR

For a rate of 4.75% on a ten year fixed mortgage on an investment property, the points being charged are probably about 2.00 points to 3.000 points.

That is totally reasonable for an investment property mortgage, especially for lower mortgage amounts.

bg0427 · Posted: Thu Feb 04, 2010 2:21 pm Post subject:

sorry but i disagree. If I were to do that loan I would make 1.35% on the back.

jveenstra · Posted: Thu Feb 04, 2010 2:26 pm Post subject: Investment

Perhaps.

Maybe not if the loan amount was $60,000

howardnugent · Posted: Thu Feb 04, 2010 4:03 pm Post subject:

Fannie/Freddie investor adjusters are 1.75 for 75% LTV and 3 for 80% LTV. There is an additional adjuster of 1 point if it's multifamily. Also, lower loan amounts typically carry additional costs.

The APR is a virtually worthless comparison tool. I prefer to do a break even analysis between two loans and figure out where the point of indifference is.

Take your fees as a percent of the loan amount and divided the interest rate differential into that number. If you compare actual interest costs on an amortization schedule, you'll break even almost exactly to the month if you calculated it that way.

Example, two loans, one with no closing costs at 5.5%, the other charging 2 points at 4.75%. (2 / (5.5 - 4.75) = 2.66) years to break even. If you'll have the house/loan for at least 2.66 years, the lower rate is a better deal. If you know you won't have it that long, the higher rate will save you money.

(Actually, I just ran the numbers, on a 10 year note, it's not quite as accurate. It comes to 3 years. But it works really well on a 30 year note.)

gmakerley · Posted: Sat Feb 06, 2010 9:04 am Post subject:

wow, howard, you must love to work with the numbers. i don't disagree with your stance about the apr being meaningless in most scenarios. since some of the fees that constitute prepaid finance charges can vary from one lender to the next (and not a whole lot), we'll get questions from prospective borrowers until Jesus comes back. "why is your apr .003 higher than that guy's apr?" for example is a question i've been asked more than once.

if borrowers are going to split hairs that close, let them go. the relationship between me and my borrower should be strong enough, based on trust and service, that a paltry tenth of a point shouldn't really get in the way of a done deal.

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