Fees and Annual Percentage Rate

1. Fees and Annual Percentage Rate

You did a great job setting up the schedule in the last lesson. For most schedules, that schedule has everything you will need for a fully functional dashboard. There are some other cases though which come up very frequently in real estate which change the way that rates and payments are calculated that we'll be going through in this lesson.

2. Upfront fees

It is common on some mortgages to have amortizing fees. These are fees paid to the bank upon creation of the mortgage, unlike non-amortizing fees like moving costs and legal fees. These fees are referred to as points, and each point represents 0.01% of the total loan. On a $100,000 loan, each point is worth $10. Since these costs increase the amount to pay back, it effectively creates a new, higher rate - the annual percentage rate.

3. Payday loans and APR

A common place to use an APR calculation is on a short-term payday loan. In these cases, the lender will typically quote a dollar figure instead of a percentage rate. An example would be to pay back $115 in 2 weeks on a $100 loan. This 15% interest over 2 weeks is nearly 400% when calculated on an annual basis.

4. Payday loan calculation

To calculate APR on a payday loan, first calculate the financing charge. That is the amount that needs to be paid back at the end of the loan less the amount loaned. Then, divide the financing charge by the initial loan balance to derive the nominal interest rate. This is multiplied by the number of periods per year. In a payday loan, this calculation is based on days - so while there are 26 full bi-weekly periods in a year, there are 26 periods plus one day for 26.07 periods. Finally, the nominal rate is multiplied by the periods per year, and the APR of 391.07% is calculated. That sounds a lot more than $30!

5. Mortgages and APR

Since a mortgage requires multiple payments to pay off the loan, the calculation is more complex than a payday loan. First, the monthly payment needs to be calculated, adding the additional fees to the mortgage principal balance. Next, the nominal rate is calculated using the RATE() function, which we'll be getting to shortly. Finally, multiply the nominal rate by the number of periods to calculate the APR.

6. Using the RATE() formula

To calculate the rate on a loan with fees, you need to use the RATE() formula. First, you need to calculate the total number of periods and periodic payments on the loan using the PMT() function. Note that the payment needs to be entered into the loan as a negative number. Next, you enter in the initial balance on the loan. This is the amount before all fees. This will calculate the nominal rate. Finally, like with the payday loan, you multiply the nominal rate by the number of periods to calculate the APR.

7. Time to calculate some APRs!

Now that you've learned about APR, it's time to get calculating some APRs!

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