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Different methods for different lenders

Posted by PAW/FL on March 26, 2009, 12:07 pm, in reply to "Oh no...."
24.26.7.45

There are 4 methods and formulae used by lenders to calculate your APR:
* Actuarial method
* Constant-ratio method
* N-ratio method
* Direct-ratio method

The actuarial method and formula for annual percentage rate (APR) are the most widely used by lenders to calculate APR. Detailed formulae, examples and explanations for borrowers of the actuarial method are provided in Regulation Z in the Consumer Credit Protection Act.

Using Excel to calculate the APR:

Step 1:
Enter the number of periods you will be borrowing the money in cell A1 of your Excel spreadsheet. For this example, enter 360, which will be the number of periods in a house note. In this instance, 360 periods is 360 months (30 years * 12 months/year). Excel's abbreviation for this part of the formula is nper (number of periods).

Step 2:
Enter the amount that will be paid in a month. The house note costs $1,600/month. Enter "-$1,600" in cell A2. This is the amount of the monthly note. Each month removes $1,600 from the payment owed. Excel's abbreviation for this is pmt (payment).

Step 3:
Enter the amount owed in cell A3. The amount owed in this example is $250,000, which is the original value of the loan amount. Enter $250,000 without the dollar sign and the comma. Excel's abbreviation for this part of the formula is pv (present value). Present value is the total amount that a series of future payments is worth now. It is the amount of money that is being financed.

Step 4:
Type "0" in cell A4. This is because at the end of the loan the desired balance is zero. The goal is to pay off the home loan. For Excel, this part of the formula is fv (future value). The future value is the balance that is desired after the payments are made.

Step 5:
Type "=Rate(A1,A2,A3,A4)*12" in cell A5. The resulting rate is 7%. This means that the annual percentage rate (APR) is 7% for a $250,000 house for which the payment is $1,600/month. The formula is multiplied by 12 in order to get the Annual Percentage Rate. If 12 were excluded, the rate returned would be the monthly APR.

(Instructions provided by AnswerBag.com

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Message Thread:

TIL - Pat/WA March 18, 2009, 8:49 am
- Re: TIL - JanetK/CA March 29, 2009, 9:43 pm
- Re: TIL - ReneeK/MI March 18, 2009, 4:06 pm
  - Great, Renee...an explanation any B can 'get'. - Lee-AR March 22, 2009, 9:43 pm
    - Keep going, Renee! - CA notary March 23, 2009, 10:14 am
      - Re: Keep going, Renee! - Craig / CA March 24, 2009, 12:12 pm
        
        Except ... but ... it's not correct =( - ReneeK/MI March 24, 2009, 4:32 pm
        
        Re: Except ... but ... it is.... as much as it can be. - Craig / CA March 25, 2009, 11:54 am
        
        =) Game on, Craig! - ReneeK/MI March 26, 2009, 3:43 am
        
        Oh no.... - Craig / CA March 26, 2009, 11:18 am
        
        Re: Oh no.... - ReneeK/MI March 26, 2009, 12:56 pm
        
        Different methods for different lenders - PAW/FL March 26, 2009, 12:07 pm
        
        Problem with step two - Craig / CA March 26, 2009, 11:39 pm
        
        Shouldn't Step 3 ... - ReneeK/MI March 26, 2009, 12:34 pm
        
        Re: Shouldn't Step 3 ... - PAW/FL March 26, 2009, 5:46 pm
        
        Not so fast there, buddy .... - ReneeK/MI March 27, 2009, 3:23 am
        
        Re: Not so fast there, buddy .... - PAW/FL March 27, 2009, 6:07 am
        
        Multiple methods... hmm. - Craig / CA March 26, 2009, 11:47 pm
        
        Re: Multiple methods... hmm. - PAW/FL March 27, 2009, 6:16 am
        
        Re: Multiple methods... hmm. - ReneeK/MI March 27, 2009, 4:17 am
        
        (forgot the link mentioned) - Craig / CA March 26, 2009, 11:19 am
        
        This should be a GREAT discussion!! - LindaH March 26, 2009, 8:17 am
      - The APR ... - ReneeK/MI March 24, 2009, 5:13 am
        
        Re: The APR ... love the 'visual'.... - Lee-AR March 24, 2009, 1:54 pm
      - Re: Keep going, Renee! - LindaH March 23, 2009, 1:43 pm
- Re: TIL - LindaH March 18, 2009, 10:14 am
  - Re: TIL - Lisa T. March 24, 2009, 9:12 pm
    - Re: TIL - Craig / CA March 25, 2009, 12:00 pm
      - Re: TIL - Lisa T. March 25, 2009, 3:23 pm
        
        Re: TIL - LindaK April 1, 2009, 6:03 pm
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--Previous Message-- : There are 4 methods and formulae used by : lenders to calculate your APR: : * Actuarial method : * Constant-ratio method : * N-ratio method : * Direct-ratio method : : The actuarial method and formula for : annual percentage rate (APR) are the : most widely used by lenders to : calculate APR. Detailed formulae, : examples and explanations for : borrowers of the actuarial method are : provided in Regulation Z in the : Consumer Credit Protection Act. : : Using Excel to calculate the APR: : : Step 1: : Enter the number of periods you will : be borrowing the money in cell A1 of : your Excel spreadsheet. For this : example, enter 360, which will be the : number of periods in a house note. In : this instance, 360 periods is 360 : months (30 years * 12 months/year). : Excel's abbreviation for this part of : the formula is nper (number of : periods). : : Step 2: : Enter the amount that will be paid in : a month. The house note costs : $1,600/month. Enter : "-$1,600" in cell A2. This : is the amount of the monthly note. : Each month removes $1,600 from the : payment owed. Excel's abbreviation for : this is pmt (payment). : : Step 3: : Enter the amount owed in cell A3. The : amount owed in this example is : $250,000, which is the original value : of the loan amount. Enter $250,000 : without the dollar sign and the comma. : Excel's abbreviation for this part of : the formula is pv (present value). : Present value is the total amount that : a series of future payments is worth : now. It is the amount of money that is : being financed. : : Step 4: : Type "0" in cell A4. This is : because at the end of the loan the : desired balance is zero. The goal is : to pay off the home loan. For Excel, : this part of the formula is fv : (future value). The future value is : the balance that is desired after the : payments are made. : : Step 5: : Type " =Rate(A1,A2,A3,A4)*12 : " in cell A5. The resulting rate : is 7%. This means that the annual : percentage rate (APR) is 7% for a : $250,000 house for which the payment : is $1,600/month. The formula is : multiplied by 12 in order to get the : Annual Percentage Rate. If 12 were : excluded, the rate returned would be : the monthly APR. : : (Instructions provided by : AnswerBag.com : : This post is strictly the opinion of : the author : and may not reflect the opinion of the : management nor of any other user of : this forum. : : Visit my website : : : : Email me : : I am not an attorney licensed to : practice law in the State of Florida, : and I may not give legal advice or : accept fees for legal advice. : : : :

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