California Mortgage Rates

An effective annual interest rate of 10% can be expressed in several ways:

1. 0.7974% effective monthly interest rate
2. 9.569% annual interest rate compounded monthly
3. 9.091% annual rate in advance.

These rates are all equivalent, but to a consumer who is not trained in the mathematics of finance, this can be confusing. APR helps to standardize how interest rates are compared, so that a 10% loan is not made to look cheaper by calling it a loan at "9.1% annually in advance".

The APR also takes into account when a loan is paid back. Suppose a loan of $100,000 is paid back in 12 monthly terms of $8771.56. Then at the end of the year a total of $105,258.72 has been paid. The APR is not, however, 5.26% but 10% because the principal amount has been paid back earlier: throughout the year instead of at the end of the year.

In addition the APR takes costs into account. Suppose for instance that $ 100,000 is borrowed with $ 1000 one-time fees paid in advance. If, in the second case, equal monthly payments are made of $ 946.01 against 9.569% compounded monthly then it takes 240 months to pay the loan back. If the $ 1000 one-time fees are taken into account then the yearly interest rate paid is effectively equal to 10.31%.

APR is dependent on the time period for which the loan is calculated. That is, the APR for one loan with a 30 year duration loan cannot be compared to the APR for another loan with a 20 year loan duration. APR can be used to show the relative impact of different payment schedules (such as balloon payments or bi-weekly payments instead of straight monthly payments), but most standard APR calculators have difficulty with those calculations.

Furthermore, most APR calculators assume that an individual will keep a particular loan until it is completely paid off resulting in the up-front fixed closing costs being amortized over the full term of the loan. If the consumer pays the loan off early, the effective interest rate achieved will be significantly higher than the APR initially calculated. This is especially problematic for mortgage loans where typical loan durations are 15 or 30 years but where many borrowers move or refinance before the loan period runs out.

In the US, the calculation and disclosure of APR is governed by the Truth in Lending Act (also known as Regulation Z. The calculation for "close-ended credit" (such as a home mortgage or auto loan) can be found here. The calculation for "open-ended credit" (such as a credit card, home equity loan or other line of credit) can be found here.
Data source-Wikipedia.org

The home loan that is right for some may not be right for others. Our job at Sierra Western is to create the perfect loan for each and every one of our clients. Our office in San Ramon processes for our loan officers who are located throughout California.