Ask the WoO #273

Re the APR post, I think it can be said that this way of determining the rate is also used in comparison to the flat rate method or simple interest method, not just to compare paying points in mortgage. These other methods are sometimes considered dubious. The push to stop these practices in this country led to the Truth in Lending Act of 1968. The APR method was touted as a more honest way to present the interest rate and I believe all lending now requires this in the U.S.

As a second point, I personally like to always use the term "interest in advance" when describing the points you pay in a mortgage. This is a little bit devilish of me, since those pushing reform also disparaged this practice and there are plenty of people who regard it as derogatory. Certainly the mortgage institutions never use the term, so I feel obligated to do so. [g] To turn this into a question, do the two practices truly differ? Obviously in mortgages it can be a good thing or not, and I do not flatly refuse to pay points, but you would never know it reading some things, such as the below. Is it true that you get screwed if you pay off your mortgage and you had paid points? Why are mortgage makers [it seems] the only people allowed this practice?

Quote: the first link above

As early as 1889, F.W. Raiffeisen used both ethical and practical grounds to dissuade the credit unions then emerging in Germany from adopting flat rate loan pricing. “It is immoral to charge interest in advance, and also objectionable as a business method. Every member shall have the right at any time to pay back his loan. If interest has been charged for a full year in advance, the members who have made repayments ahead of time, pay too much interest, unless the Credit Union makes a refund. The first arrangement is unjust, the latter involves complicated bookkeeping.”

Thanks. I did some checking and it looks like you're right. I didn't know the APR was supposed to also translate an interest rate compounded monthly to annually. Based on that change, I reworded my answer to an APR of 5.9635%. Do you agree?

Quote: Wizard

Thanks. I did some checking and it looks like you're right. I didn't know the APR was supposed to also translate an interest rate compounded monthly to annually. Based on that change, I reworded my answer to an APR of 5.9635%. Do you agree?

I'm sure your math needs no checking, but I see you have broadened how the term APR is used. That looks better.

Due to you spurring my interest, I have gotten more interested in the factor for people refinancing. I myself did pay points when I bought my house; to be exact, the seller paid the points. When I refinanced, I am fairly sure what was paid in points was no longer considered. However, if I had paid the points and not the seller, a refund of part of the points would have been in order? Or should it matter either way? Is it just a fact this is never done? I almost want to wince to think what would be required to compare rates with and without points if it is just standard procedure to view points paid as 'water under the bridge' when later refinancing. Should you have to say in your post that X is comparable to Y with the assumption that there will be no refinancing!? edit: to be clear, these are questions, I really don't know for sure how this is typically handled.

as for spotting general errors

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which an interest rate with no points and compounded annually.

this clause has a subject without a verb...

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What would be the APR interest rate?

some style and usage folks would say this last should just be "what would be the APR?" ... perhaps that is getting picky.

Thanks for letting me participate.

My experience has been that paying points is a waste of money. Thus far I have not carried any mortgage for more than 4-5 years so paying points would not have been worth it. Once I even had the bank pay me a point (negative point) to buy up the interest rate in order to negate my closing costs.