How is APR calculated?
Federal regulations define Annual Percentage Rate (APR) as the total cost of your credit calculated as an annual rate. The APR will almost always be higher than the Interest Rate (with some exceptions on ARM loans). For purposes of the APR calculation, points, lender fees and prepaid interest amounts collected at closing are known as “Prepaid Finance Charges.” The Loan Amount minus the Prepaid Finance Charges is known as the “Amount Financed.” On a fixed rate loan, the APR can be calculated using a simple financial calculator. By inputting the Loan Amount, Term and Interest Rate, one can solve for the Monthly Payment. By then inputting the Amount Financed, Term and Monthly Payment, one can solve for the APR. For example, on a $100,000 Loan Amount, a 30-year Term and a 5% Note Rate, the Monthly Payment is calculated at $536.82 (principal and interest). Assuming $2,000 in Prepaid Finance Charges, using the $98,000 Amount Financed, same 30-year Term and same Monthly Payment of $536.82, th
