How do I calculate APR for interest-only loans

[Guest]

Two interest only loans, how the heck do I calculate APR?

First -- $500,000 loan for 2 years (24 months) at 9.5% (3,958.33/mo). Fees
of $11,090.56 are deducted from loan amount for a net funding of 488,909.44
and include a 2 point origination fee ($10,000); prepaid interest from
6/23-6/30 of $1,055.56; and a $35 wire fee. Is prepaid interest is
considered a fee for this calculation???

Second - $1,250,000 loan for 3 years (36 months). First 2 years at 9.5%
(9,895.83/mo); 3rd year at 10.5% (10,937.50/mo). Fees of $54,479.44 are
deducted from loan amount for a net funding of $1,195,520.56 and include a
4.25% origination fee (53,125); prepaid interest from 6/27-6/30 ($1,319.44);
and a $35 wire fee. Again, is prepaid interest considered a fee for this
calculation?

 

[Fred Smith]

The answer to the first question is easy. The APR on an interest only loan is
the interest rate. As the principal never reduces with an interest only loan,
there's no amortization you need to do.

For the second question, I would not consider prepaid interest as part of the
fee. It's a timing question. It allows you to make payments at the end of the
month, rather on, for example, the 27th as in the second loan.

 

[Guest]

Nahhhh....that's not it.

The APR is defined as the actual rate the consumer pays, taking into account
origination fees, etc. If the $500,000 loan were costing the borrower only
the interest on the $500,000 loan, the APR would equal the nominal rate. But
the borrower is also paying $10,000 in origination fees, prepaid interest of
$1,055.56 and a $35 wire fee. Effectively, Borrower is getting up-front
$488,909.44, not $500,000, and yet paying monthly interest-only payments of
$3,958.33 calculated on the $500,000. So you see the annual percentage rate
differs from the stated rate.

 

[Guest]

Actually, I know prepaid interest goes into the APR calculation based on Reg
Z requirements, I just didn't know what part of the equation the prepaid
interest went into. Prepaid interest is also considered a cost of the loan,
just like interest during the term of the loan. My question was whether or
not the prepaid interest was lumped with the other interest payments since it
is also interest, or whether it was lumped with the other prepaid costs like
origination and wire fees. Time value of money considerations suggest it's
lumped in with the prepaid costs.

 

[N Harkawat]

For 1st option APR is
=RATE(24,3958.33,-488909.44,500000)*12
=10.74%

For 2nd option since the rates vary we will use the IRR function as
follows: -
On cell A1 enter the present value of funding = -1195520.56
From cell A2 thru cell A36 enter +9895.83
On cell A37 enter =9895.83+1250000 (for retrurning the principal and last
months interest)

To get the APR type this formula
=IRR(a1:a37,0.01)*12
=11.22%