Interest rates

bus_driverNovember 9, 2010

I hear ads on the radio from Quicken Loans offering 3.5%, APR 3.95%. In the old days when I took a course in financial math, "discount" loans were expressed this way. But direct reduction loans had the stated and APR as the same rate. So what gives with Quicken?

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dave_donhoff

Hi bus_driver,

I kinda doubt that any course you took in finance detailed out how the regulated mortgage APR calculations are made (and I am not intending to offend.) It is very convoluted, and study after study has found it to be inconsistently applied among mortgage companies.

Simply explained;
The APR figure is a number that treats all financing costs, added to the anticipated lifetime interest costs of a loan paid in minimum payments, and backward amortizes them back into the principal. This number LOOKS like an interest rate number, but it isn't.

Of course, logic would therefore say that a quoted APR must *ALWAYS* be higher than the parallel quoted interest rate, since it is that rate of interest PLUS the costs incurred. But this logic only holds true for fixed rate loans.

On adjustable rate loans the calculation is allowed to assume that the underlying adjustment index never changes... which often means that after the initially rate-locked period the new rates will DROP... making the fore-quoted APR actually appear to be LOWER than the fore-quoted parellel interest rate.

Confused yet? No? OK... let me add more.

When a leverage plan is designed to accelerate the set-off or retirement of the loan balance the plan's lifetime interest costs drop, resulting in an even LOWER APR.

Do the same thing with a side investment account (what we call a Mortgage Freedom Account) that consistently earns MORE in safe yield than the face costs of the mortgage interest, and you can actually have a NEGATIVE APR!

How's THAT for fun?

Dave Donhoff
Leverage Planner

    Bookmark   November 9, 2010 at 7:23PM
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