How Do You Calculate APR When You Have Upfront Costs?
APR, or annual percentage yield, is a variation on the interest rate that allows you to incorporate upfront costs into the calculation of the interest rate. Lenders and borrowers commonly look at the APR for mortgages because of the significant upfront costs associated with closing; however, APR assumes that you will keep the loan for the entire term of the loan. If you pay off the loan early, the effective APR will be higher.
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Instructions
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Determine the amount you will need to borrow. If you have already taken out the loan, you can find this amount in your loan documents.
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Add up the closing costs of the loan. This includes origination fees, attorney fees, and discount points that you pay.
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Compute the number of months you will take to repay the loan by multiplying the number of years in the term of the loan by 12. For example, if you were taking out a 30-year mortgage, you would multiply 12 by 30 to get 360 months.
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Consult your loan documents to find the interest rate expressed as a percentage.
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Use an online calculator (see Resources) to find the APR by plugging in the amount borrowed, the amount of upfront costs, the interest rate and the number of months in the term of the loan. For example, if you took out a $260,000 mortgage for 360 months at 6.5 percent with $6,000 in upfront costs, you would find an APR of 6.7207 percent.
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References
Resources
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