Guest Author:  Bob Chiodo

                                                bobchiodo@equityhome.com

                                                Equity Home Mortgage, LLC

 *Rates:

•  30 yr conforming=6.25%
•  30 yr jumbo=6.625% (to $600k)
•  7/1 jumbo=5.75%
•  OR Vet=5.5%
•  OR Bond FHA=5.75%

There is still a lot of volatility in the market place. The rates down a little off of this week’s high.  We are still expecting the Fed and ECB will lead the way to higher rates in the future, we don’t look for any central bank to begin tightening until later this year. The action in the bond market on Tuesday and Wednesday, is taking back a lot of the selling that was instigated by the view last week the Fed was about to move.

In this week’s installment on Good Faith Estimates (GFE) I am going to discuss my take – and that’s my take only – on Annual Percentage Rate or APR.  First of all, I think that the APR, even though it’s a regulatory requirement, is a terrible way to compare loan programs. APR’s are very difficult, if not impossible, to calculate without a computer. In fact, I don’t know anyone in our business who can calculate an APR by using only a calculator. I have been in this business for almost 30 years and, although I learned how to a long time ago, I can’t calculate one without my processing software program. I would say that most in our business don’t truly understand what goes into the calculation and how it relates to the Truth-In-Lending form. To me, though, it doesn’t matter.  I think that most in our industry understand that the APR disclosure needs to change but getting a consensus on how it should change has been very difficult to accomplish.

A couple of problems with the APR is most don’t understand how APR is calculated, then how can they tell if it is accurate and what changes it? The APR takes certain costs and fees charged on a loan (Prepaid Finance Charges) and includes these certain charges into an amount called Finance Charges (which also includes the interest paid on the loan over it’s term).  These Prepaid Finance Charges are removed from the loan amount with the remainder being labeled the Amount Financed. Then the Finance Charges are calculated back into the Amount Financed and you get your APR. Sound confusing? You betcha! There are things that will change the APR. Prepaid interest can change the APR – which means that the date the transaction closes will change it. What we estimate for some third party fees (escrow charges) will change it. I do primarily purchase transactions. If the seller contributes money to the buyer’s closing costs, this will change the APR. I just ran one scenario where the seller paid most of the buyer’s closing costs (this happens frequently) and the APR came back lower than the actual interest rate. That’s because the seller paid an amount in excess of the prepaid finance charges – part of the closing costs aren’t considered Prepaid Finance Charges.

 

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