Posted by Craig / CA
on March 25, 2009, 11:54 am, in reply to "Except ... but ... it's not correct =("
69.235.2.50
--Previous Message--
: The APR is only good when comparing
: apples TO apples - useless to use to
: compare different loan
: products....also, it is an annual
: rate, but based on the interest over
: the entire life of the loan (not just
: the first seven years). That's why
: it's useless to use it to compare a
: 30-yr product with a 15-yr product
: (for example).
:
: But other than THAT ...
I'm going to agree to disagree, my background comes from compliance....
Your statement that it is based upon the interest over the life of the loan is correct. However if that's all it was, the rate and the APR would be one in the same. And... it is not an annual rate, but an annualized rate. There is a major difference between the two.
The difference between an annual rate and an annualized rate is like the difference between a simple interest, and a yield on a saving account. But I realize most people don't understand that difference either.
The APR was created to compare apples to oranges. No it's not perfect, as one can't accurately predict the ebb & flow of adjustable rates, it assumes max upward adjustments for the 7 yr period.
I'll give you to real world examples that show why the full term is not used. Because Adj. use max upward movement, someone with a 3% teaser, and say 5% rate, would never have their nerves calmed if they saw a 9-11% APR. Two, get a quote from your favorite broker for a (15, 20, 30) year term fixed rate, then get a quote for a 10/30 fixed/adj. loan If all fees are identical, you will find the APR's will match.
The itemized fees are amortized over a 7 yr period, recalculated back into the interest rate, and recalculated on an annualized bases over the 7 yrs.
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