Date: September 18, 2004
By: Brenda S. Stone
Title: Annual Percentage Rate for Notary Signing Agents
Websites: www.TexNotary.com &
Disclaimer: The information you are about to read was written by Brenda Stone, a BryanCollege Station, Texas residient, who is also a Brazos County Notary Public in and for the State of Texas. The author is also a Notary Loan Signing Agent. Be advised: The author has no formal training in finance, law, or real estate and holds no college degree. Consider this to be an article created from an uneducated opinion. Use any information in this article at your own risk. Information from this article may not be reprinted or used without written permission from the author.
Annual Percentage Rate
(For Notary Signing Agents, Borrowers, Consumers, and those seeking to Refinance a Mortgage Loan)
To the Reader: Those looking to refinance a loan may find the article helpful, however, the primary audience for this information is the Notary Signing Agent who handles loan signings as an independent contractor for signing agencies, title companies or lenders.
Notary Signing Agents (NSAs) may experience a little resistance from borrowers refinancing a mortgage loan when they review the document entitled Truth in Lending Disclosure (TIL). The borrower may question the amount stated on the TIL to be the Annual Percentage Rate (APR).
The borrower often asks: “Why is the APR higher on this document than the Note’s stated interest rate?”
Some lenders include a sheet with the document package which explains the difference. NSAs should refer the borrower to this explanation for the borrowers to read and interpret for themselves.
If that is not available, or if the borrower is still hesitant to sign the TIL, it is better to have them contact the lender to get an explanation than for the NSA to attempt an explanation.
However, it helps an NSA to understand what the APR is and why it is different than the percentage rate stated in the note. Simply stated:
The APR is a number (or rate) resulting from a standardized formula that includes all costs of the loan, as well as the interest rate and length of the loan.
It has nothing to do with the Note, except that information from the Note is used in the formula of computing the APR. The APR affects nothing in the repayment of the loan.
BankSite.com, an internet site, has an interactive calculator for calculating an APR by plugging in the interest rate, payment, length of the loan and closing costs. Here are the numbers you will need to calculate an APR on BankSite.com:
(From the Note)
Amount of Loan
Years
Interest Rate
(From the Settlement Statement)
Points paid
Closing costs
By using the BankSite.com APR calculator and reading the explanation and examples below, an NSA may get more comfortable with the term “APR.” Other tools and links for the purpose of this article can be found at these links:
GoodMortgage.com  BankSite.com  Amortization Calculator  TexNotary.com Glossary 
Discussion and Examples
To arrive at an understanding of how the APR differs from the rate in the note, it will be better to show it through examples. To that end, we are going to set up a couple of examples and imaginary lenders.
In Example #1, we are going to gather the information needed to calculate the APR, and explain how it is calculated. Later, this example will be referred to in a comparison of mortgage loans.
Next, we will discuss why there is an APR formula, then cover what would happen if only the rate in a note were all that a borrower considered when choosing a lender to refinance a mortgage loan.
Then, we will set up Example #2 – Lender #2, arrive at the APR from that loan, then conclude this article by comparing the two examples and the two lenders’ loans and terms.
Example #1 – Lender #1
For the purpose of discussion, we will call this Example #1 and will say it is offered by "Lender #1." We will get the finance charges by using the interest rate in the Note, loan amount, and the amortization of the interest charges over the number of years the amount is financed for.
We will get the Points Buy Down and Closing Costs from an imaginary HUD1 Settlement Statement which an NSA would presumably be able to refer to.
In Example #1, let’s say the loan is for $60,000, for 30 years, at 5.2 percent (Fixed).
Also, let’s say that the Borrower’s miscellaneous closing costs are $4200 and they will pay 2 points (2% of the loan amount which is $1200). The total upfront closing costs are now: $5400.
The monthly payment is calculated to be $329.47, as stated in the Note, over the life of the loan which is 30 years.
Based upon the amounts stated above, if you plug this information into the BankSite.com calculator you will see that the APR is 5.984%.
If the BankSite.com calculator is not available to the reader, perhaps the APR calculation of these factors explained in Example #1 will help reveal the method used to arrive at the rate of 5.98%. (For our purposes, we will assume we have a Note and HUD1 Settlement Statement to refer to, and that the Notes are at a fixed rate.)
On Side “A” is the information that is stated in the Note. The only costs of the loan that can be calculated from the information in the Note are interest or finance charges.
(To get interest or finance charges, if you do not have an amortization calculator, but you do have a note to look at, you can take the total amount of the monthly payment stated in the Note, multiply it by the number of payments which will be made and get the total. From the total, subtract the loan amount and that will be the total amount of interest or finance charges.
All tools used to arrive at the amounts in Example #1 are in the links at the end of this article.)
On Side “B” is the information which can be collected from the Note and HUD1 Settlement Statement. From this side of Example #1 a true picture of all costs of the loan will be revealed which includes not only interest charges, but also the closing costs of the loan. When all of these costs are available, an APR can be calculated.
Example #1 – Lender #1:

Why do this?
Because this gives lenders a truthful way to state, or report, an allinclusive total of the note interest rate PLUS closing costs through a formula which results in an APR rate.
The APR is standardized and can be used to fully compare one lender’s loan to another lender’s loan.
Without the APR method of looking at loan costs, it is impossible to see the best loan available, or to report the costs of a lender’s loans in a comparable method.
If lenders stated and reported loan rates at a note rate of 5.2 percent interest; the 5.2% rate might look like a great deal at first glance in comparison to another lender’s rate of 5.5%. However, the rate on the note will not reflect the closing cost information or the 2 point buy down which is required.
Without charges other than finances charges disclosed, the loan’s true cost is not reflected.
APR for Comparing Loans
When comparing loans to determine which one is a better deal, if only the Note Interest Rate is considered, the information needed to analyze and compare loans will not be complete.
Here is a very elementary comparison of two loans:
Lender #1 quotes the Note Interest Rate at 5.2%, and we’ll use the example costs and rates in Example #1 above.
Lender #2 is quoting the Note Interest Rate at 5.5% and we’ll use the example costs and rates in Example #2 below.
At first glance at the Note Interest Rate, it appears that Lender #1 is the winning bid for the cheaper loan.
However, the Note Interest Rate does not disclose the total costs of the loan.
From Example #1, we can see that the total cost of a loan is the amount of
Finance Charges (Interest) + Points Buy Down + Closing Costs.
In this situation, Lender #1 is lending the money at the Note Rate of 5.2 %. However, remember that Lender #1 also required a 2point buy down ($1200) and an additional $4200.00 in closing costs.
To know how to equally compare Lender #1 and Lender #2, we have to determine all the costs on the loan offered by Lender #2. For the sake of discussion and making this easy to come to an understanding the difference of the rate stated in the Note and the APR, we will say that Lender #2 is charging no points, and closing costs will be no more than $1200.
What we will conclude is Lender #2 is offering a loan of a 5.5% Note Interest Rate which will produce an APR of 5.6803% given all the other costs of the loan factored into the formula.
On the other hand, Lender #1, who is quoting 5.2 % rate of finance charges in the note has higher closing costs. And, when we calculated finance charges plus the other costs of this loan, the APR is 5.9841%.
In the final analysis, Lender #1’s loan has a cost which is higher than that of Lender #2.
Using the same way of analyzing Lender #2’s loan as we did in Example #1, here is how it will break down:
Example #2 – Lender #2

A final comparison to see the difference in actual costs of the loans when considering all factors used to compute APR:

Lender #1 
Lender #2 

Loan Amount 
$60,000 
$60,000 

Note Interest Rate 
5.2% 
5.5% 

Monthly Payments 
$329.47 
$340.67 

Total Payments over 30 years 
$118,609.20 
$122,614.20 

Total Finance Charges 
$58,609.20 
$62,641.20 

Total Closing Costs 
$4500.00 
$1200.00 

Total Loan Costs, not including the principal amount 
$64,009.20 
$63,841.20 
ß Difference in Cost: $168.00 
APR 
5.984 % 
5.6803% 
ß Difference in APR: 0.3% 
For tools and more reading on APR, I would recommend:
GoodMortgage.com  BankSite.com  Amortization Calculator  TexNotary.com Glossary 
Title: Annual Percentage Rate (For Notary Signing Agents, Borrowers, Consumers, and those seeking to Refinance a Mortgage Loan)
By: Brenda Stone, Loan Signing Agent, College Station  Bryan, Texas 77845
Contact information: 8778298395, agent@texnotary.com
Disclaimer: This article was written by Brenda Stone, a BryanCollege Station, Texas resident, who is also a Brazos County Notary Public in and for the State of Texas. The author is also a Notary Loan Signing Agent. Be advised: The author has no formal training in finance, law, or real estate and holds no college degree. Consider this to be an article created from an uneducated opinion. Use any information in this article at your own risk. Information from this article may not be reprinted or used without written permission from the author.