Interest rates vary widely between banks.
Because of this, it is hard to know which bank has the lowest interest rate. What is the standard for borrowing money from a bank? Let's find the answer to this question.
The first thing to look at when it comes to loans is “APR.” It is an abbreviation for Annual Percentage Rate and refers to the “annual interest rate.” “APR” is a rate created to show the actual interest cost, and is a “profiteering law” interest rate created to prevent banks from unfairly enticing customers with low interest rates and charging exorbitantly high additional costs to make huge profits.
However, a high APR “annual rate” is not always bad. This is because each bank has a different way of calculating APR. Therefore, in order to compare interest rates with good terms, you need to compare the expected total cost of the loan (Good Faith Estimate) along with the APR to see which bank has the lowest interest rate. How is APR calculated?
Some of the factors that are included when calculating APR include:
(1) Point (Broker Commission-Loan Fee)
(2) Pre-Paid Interest (Total interest from the date the loan was issued to the end of the month)
(3) Loan Processing Fee (Loan Document Processing Fee)
(4) Underwriting Fee (Document Review Fee)
(5) Document-Preparation Fee (cost of preparing final loan documents)
(6) Private Mortgage Insurance (applies only when down payment is 20% or less)
(7) Appraisal Fee (House Appraisal Fee)
(8) There is a Credit Report Fee, etc.
Here are some things that aren't usually included when calculating APR:
(1) Title Insurance (Home Deed Insurance)
(2) Escrow Fee
(3) Attorney's Fee
(4) Notary Fee
(5) Home Inspection Fee
(6) Recording Fee
(7) Transfer Fee, etc.
There are two ways to calculate APR: a single payment method, where the loan amount is repaid in full at a set time, and an installation method, where the loan principal and interest are repaid monthly.
The Single-Payment APR interest rate method can be understood with this calculation.
Let's say you borrow $1,000 at an annual interest rate of 10% and pay an additional $25 in application fees. After one year, you will have to repay $125 (the actual interest plus the loan fee). If you calculate this using the simple interest method, the interest and loan fee will be deducted, so you will receive $875 when you first borrow.
In this case, the APR is $125/$875=14.3%. If it is an Installment Loan that repays both principal and interest every month (if the payment is a fixed interest calculated by dividing the interest and principal), the APR is calculated based on the unpaid principal, but the formula and calculation are complicated, so it is calculated by computer using an interest rate program.
Usually, the APR and the actual interest rate do not match. The APR is 0.25% to 0.5% higher than the actual interest rate. This is because the APR in mortgages is calculated based on the total loan amount. For example, if a loan of $100,000 costs $5,000, the APR is calculated based on $95,000, so it is higher than the actual interest rate. Calculating interest rates is difficult. Even banks sometimes do not know exactly what costs are included in the APR. This is because the calculation is complicated.
Consumers do not need to know about complicated calculations. However, consumers can receive a home loan with a relatively low interest rate by comparing and reviewing the low APR and Good Faith Estimate (estimated loan cost) offered by the bank and then selecting the bank to receive the loan from.
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