Marcy’s husband came into the room and said, “It sounds like a broken record in here, what are you doing?” Marcy, having grown up with CD’s couldn’t understand the analogy. Marcy informed him that she was practicing explaining the APR. But, that the definition was long and complicated, so she had to keep saying it over and over until it was natural. Then, tomorrow she planned to do the same thing. You get in practice, and you get out of practice just as easily, so Marcy decided to always be at the top of her game.
That night while they were sleeping, Marcy started talking in her sleep, “It doesn’t include closing costs… it is compounded annually.” If her husband hadn’t already been asleep, he wouldn’t fallen asleep from such a boring rant. Her husband was sleeping during this episode, but his subconscious heard everything and he started talking in his sleep saying, “Why can’t she just stay home and take care of Chuckie? snore…. snore… Chuckie…. snore…”
So, Marcy got to her next signing. They went through the documents. Then, she said, “Do you want me to tell you why your APR is higher than your Rate?” The borrower said, “Actually, our Lender already told us.” Marcy realized that her borrowers knew more than she did about loans. But, she didn’t regret practicing. It was one less thing to screw up on some future loan. At this point Marcy didn’t care how often she had to know something, she just didn’t want to screw up and lose her self-respect. It took about seven more signings until she had a borrower who was very confused. Marcy rattled off her definition of the APR and the borrower had to ask her to repeat it slowly. After a few tries the borrower kind of understood the inverse relationship of the equation and how some of the fees and closing costs were deducted. Marcy had memorized exactly which fees were included or excluded from the formula for calculating the APR and people were very impressed with her knowledge. A few asked her if she was an Escrow Agent.
Marcy was also smart by including a disclaimer in her speech stating that her explanation of the APR was a general one and wasn’t necessarily applicable to the borrower’s particular transaction in all ways.
The next thing you know the borrowers were asking Marcy for legal advice. Once again, Marcy played her cards correctly and told them that she was not an Attorney, and that she could not answer legal questions for them. Then, she suggested that they contact an Attorney. Another smart move. It looks like Marcy went from being clueless to being a very savvy and satisfied Notary in only a few weeks of hard knocks and studying. That night in her sleep, she went “z-z-z-z-z-z.”
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Point (17) The APR
The APR is one of the most frequently asked about loan terms that exists. Notaries and Mortgage Brokers almost always sound very poorly rehearsed when they explain this very basic concept. To avoid sounding unprofessional, try to memorize as much as you can about how the APR is calculated, and also try to rehearse a comprehensive definition of the APR so that you will appear knowledgeable to clients and to us when we test you!
Quick Facts
(1) The APR is documented on the Truth in Lending Disclosure.
(2) The APR is usually but not always higher than the Rate.
(3) Your definition for the APR should include the fact that it could include loan origination fees, closing costs, appraisal fees, inspection fees, points, escrow fees, notary fees, and other costs of the loan — those are some of the big ones.
(4) If you mention that the APR is often used to compare loans, you get points on the phone test.
(5) If you mention that the APR might be compounded, you get points.
(6) Several notaries have claimed that there is no government standard for computing the APR, it is up to each individual lender.
(7) You could also claim that the APR includes the interest rate, all fees and costs of the loan, and incorporates them all into a compounded Annual Percentage Rate.
(8) There are many ways to define the APR, the key is to mention all of the components in a clear and easy to understand way.
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When we ask notaries about the APR, the answers we get are very inconclusive such as:
“It included the fees”
“It is the cost of the loan”
“It has the interest and fees”
“It is different from the Rate because it is annual”
How unprofessional. If you are a professional signer, you need a professional definition.
A Mortgage Company’s definition of the APR
The Annual Percentage Rate (APR) is an interest rate that is different from the note Rate. It is commonly used to compare loan programs from different lending companies. The Federal Truth in Lending law requires that mortgage companies disclose the APR when they advertise a rate.The APR does NOT change or affect your your monthly payments. Your monthly payments are a function of the interest rate as well as the length of the loan. We provide calculators to calculate your monthly payment as well as your APR.
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Jeremy’s official definition of the APR
The APR is the relationship between the payments and the amount borrowed, minus the fees expressed as a compounded annual rate. This rate is often used to compare the different loans borrowers have to choose from. The APR is almost always higher than the Rate. The Rate, on the other hand, is a monthly percentage relationship between the payments and the total amount borrowed, including fees.
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Fees included in computing the APR:
Points (discount and origination points)
Pre-paid interest
Loan processing fees
Underwriting fees
Document preparation fees
PMI – Private Mortgage Insurance
Appraisal Fees
Credit Reporting Fees
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Fees not normally included when computing the APR
Title or Abstract Fees
Escrow Fees
Notary Fees
Home Inspection Fees
Transfer Taxes
Recording Fees
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Although my delightful sounding definition of the APR sounds very professional, there is no reason why you shouldn’t come up with your own, and practice it until you sound perfect. One objection that I have is that Notaries sound unrehearsed when talking about the APR even if they have signed 10,000 loans. If you are a professional, then sound professional!
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You might also like:
30 Point Course Table of Contents
http://blog.123notary.com/?cat=3442
30 Point Course (18-24) Technical Points
http://blog.123notary.com/?p=14492
How do you explain the APR to a non-borrowing spouse?
http://blog.123notary.com/?p=4455
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How do you explain the APR to a non-borrowing spouse?
I was talking to a notary on the East Coast. I was going to ask him a loan signing question, but then he retorted back a question in my direction before I could ask my question.
How do you explain the APR to a non-borrowing spouse?, he asked.
I gave him my routine mathematical definition of the APR and he was impressed. When he asked the question, I was thinking that this is a great question. It sounded like a trick question, but it actually is a very reasonable question. It suddenly occurred to me that the non-borrowing spouse is the epitome of a lay-person, and doesn’t understand complicated terms such as “amortized” or “finance charges”. If you have an MBA in Finance, you might not be the best person to explain an APR to someone’s wife. So, part of the genius of this question is that it tells you to use layperson language without telling you directly.
The other great aspect of this question is that it gives the opportunity to tangent goers to go off on a tangent — and they take this opportunity. I ask this question to many people, and 20% of the people go off on a very long explanation of what documents the non-borrowing spouse has to sign. But, that has nothing to do with the question. They didn’t LISTEN. This is a good listening and tangent going question. You learn very quickly who listens, and who can talk as well.
People notoriously leave out 90% of the meat of the answer when describing this confusing and diabolical term.
“It includes the fees”
Trust me, it includes a lot more than the fees.
“It reflects the cost of the loan”
Trust me, it also includes your interest as well as whatever the cost is.
“It’s usually higher than the rate”
Boy, are we being vague.
“It includes interest and fees”
Better, but very uneducated sounding.
Most answers to this question are either missing the target, or miss the main point of the APR.
The APR is a RATIO that is based on the payments relative to the total amount financed after: some of the finance charges, perhaps points, perhaps loan origination fees, PMI, and perhaps other fees have been deducted — and is reflected on a compounded annual rate.
I am not a lender and don’t know the “Real” definition. But, how the APR is calculated can vary from state to state, and from lender to lender. So, there is no absolute definition, but only definitions that are approximate. Unfortunately, the definitions I am hearing from the notaries are overly simplistic and generally just plain wrong!
You might also like:
What traits do escrow officers look for in Notaries?
http://blog.123notary.com/?p=21050
The Right to Cancel Done Wrong
http://blog.123notary.com/?p=10001
The 30 point course guide to the APR
http://blog.123notary.com/?p=14483
Common mistakes with the APR
http://blog.123notary.com/?p=4553