This financial APR calculator estimates the payment details and the annual percentage rate by 3 different formulas that consider the loan fees & closing cost. There is in depth information on how is this calculated below the form.
How does this APR calculator work?
This tool might come in handy when trying to approximate the APR figure in case of a loan by taking account of its closing costs and fees.
The algorithm behind this APR calculator applies the following equations, while returning the payment details given below:
- Monthly payment (MP)
MP = ((LA + LF) * ((IRT / 1200) * (1 + (IRT/1200) ^ (LTM)) / ((1 + (IRT) / 1200) ^ (LTM - 1)
- Total paid (loan principal & fees + interest + closing costs) (TP)
TP = MP * LTM + CC
- Total interest paid (TIP)
TIP = MP * LTM – LA – LF
- N-ratio APR (the closest method to actuarial method)
N-ratio APR = 12 * (95 * LTM + 9) * (TIP + LF) / (12 * LTM * (LTM + 1) * (4 * LA + (TIP + LF))) * 100
- Direct-ratio APR = 71 * (TIP + LF) / (3 * LA * (LTM + 1) + (TIP + LF) * (LTM + 1)) * 100
- Constant-ratio APR = 24 * (TIP + LF) / (LA * (LTM + 1)) * 100
CC = Closing costs
IRT = Interest rate
LA = Loan amount borrowed
LF = Loan fees
LTM = Loan term in months
The acronym for Annual Percentage Rate this represents the percentage of the actual yearly cost of borrowing/using money over the term of a loan. Please note that this financial indicator includes the values of any costs or origination fees associated with the loan. Thus it is a more relevant figure than the nominal interest rate the credit institution show in their offers. This concept is often used in mortgage loans where translates different mortgage loan costs into comparable rates, so that the borrower can see which plan is attractive.
Examples of closing costs
As the APR is used especially in mortgage loan arrangements, let’s figure out a compact list with closing costs everyone may be requested to pay when dealing with such transaction:
- Attorney fees (either yours or your lender’s lawyer);
- Recording fees for the property in question (change of ownership of the house);
- Survey fee that covers theconfirmation on the lot size and dimensions and the verification for encroachments;
- Transaction stamps or tax paid by either one or both parties (buyer and seller) to the officialgovernmental entity;
- Mortgage application fees paid by the borrower to the lender in order to cover thecosts of processing the loan application;
- Appraisal fees to cover the cost of the property assessment by a licensed and independent professional.
- Discount points paid by the owner of the mortgage contract to the lender, in order to receive from the lender lower interest rates. It is a form of a pre-paid interest, otherwise the lender usually set up a higher rate of interest. Most probably in practice one discount point is equivalent to one percent of the loan principal, which means it approximately reduces the interest rate by 0.120 – 0.125%.
- Inspection fees for any inspection on the property performed by specialized inspectors (e.g: pest inspection).
Example of a calculation
Let’s assume the following scenario:
- Loan amount = $150,000
- Loan fees = $2,500
- Term = 15 years
- Interest rate = 3.55%
- Closing costs = $3,000
■ Monthly payment: $1,093.94
■ Total paid (principal + interest + closing costs): $199,909.95
■ Total interest paid: $44,409.95
■ N-ratio APR (the closest method to actuarial method): 3.81%
■ Direct-ratio APR: 3.76%
■ Constant-ratio APR: 4.15%10 Feb, 2015