APR- revisited

I was explaining the difference between “note rate” and APR to one of my friends the other day and watched as his eyes glazed over in incomprehension. Perhaps if APR had been taught in high school in econ or math class, we wouldn’t be seeing the rising rate of home mortgage delinquencies or foreclosures that are now occurring.
To try and put this in understandable terms, and I admit that my friends eyes glazing over was more then partly my responsibility, let’s start with why APR disclosure for loans is required and build on that. The Real Estate and Settlements Procedure Act (RESPA) was put into law in 1974. In addition to many other consumer friendly provisions, RESPA requires that all costs for a mortgage loan be disclosed within 3 days of application. Prior to RESPA, some lenders would advertise loans with interest rates far below what the market rates were. In order to receive these low rates, however, the costs (points) were extremely high. What the APR calculation does is take the note rate, currently about 6.125% for up to a $417,000 home loan, add in all the costs that are associated with obtaining that loan, add in the interest that will be paid over the life of the loan and express this total as an annual percentage rate (APR). That’s why when at the end of the column I say whether the interest rates are 0 points, 2 points or however many points they are; and, put the APR in also. If it is a 0 point loan, then the other costs that will add into the APR are title insurance, escrow services, appraisal fees and any other fee from all other service providers that may be expected to billed in the course of getting the loan. For a 0 point loan you should expect the APR to be in the neighborhood of a quarter point higher then the note rate.
Now, looking at adjustable rate mortgages. A 0 point loan will also express the APR the same quarter point higher then the true note rate. This all leads back to the higher mortgage delinquencies and foreclosures. When these option arm rates are advertised at starting at 1%, they are talking about the initial note rate. If you read the APR on those loans, they are usually around 7-8%.
I am aware that this may not have been explained in an understandable way, so if anyone wants a free pamphlet to make it a little more clear, give me a call and I’ll mail it right out.

Fixed rates for conforming mortgages (under $417,000) at 0 points as of 2/22/07 (p.m.) are:
30 year fixed: 6.25% (APR 6.32%) payments are $2,567.54/mo.
15 year fixed: 5.875% (APR 6.00%) payments are $3,490.78/mo.