The usefulness of the APR for mortgage marketing in the USA and the UK

Buch, Joshua; Rhoda, Kenneth L.; Talaga, James

doi:10.1108/02652320210419689

Cited by 5 publications

(3 citation statements)

References 4 publications

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“…The tax‐deductible items of a mortgage loan that are used in our formula for the after‐tax APR are based on those stipulated under US tax laws. However, the methodology used to derive our formula can easily be adapted to the other internal rate of return methods such as the annual effective rate of return (AER) method of Buch et al (2002), thereby producing a tax‐adjusted AER.…”

Section: Closing Commentsmentioning

confidence: 99%

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A formula for the after‐tax APR for home mortgages

Ramsay

Oguledo²

2005

Intl Jnl of Bank Marketing

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PurposeThe purpose of this paper is to provide a simple formula for determining a borrower's APR for mortgage loans after including the effects of mortgage interest tax deductions.Design/methodology/approachThis formula is derived by adjusting the APR provided by the lender for the length of the mortgage, the amount of discount points, the mortgage interest rate, and the borrower's tax rate.FindingsFrom this formula, it is found that the tax‐adjusted APR is not only lower but also more informative than the traditional APR.Research limitations/implicationsThe tax‐deductible items of a mortgage loan used in this formula for after‐tax APR are based on those stipulated under US tax law. However, this formula can easily be adapted to other internal rate of return methods such as the annual effective rate of return (AER). In addition, further research is needed to develop a formula when a mortgage loan is the result of a refinance. Under this situation, mortgage discount points are no longer tax‐deductible in the year of their occurrence. Rather, the deduction of points must be amortized over the life of the loan.Practical implicationsThe tax‐adjusted APR formula developed in this paper is tailored to each mortgage applicant by providing a more realistic assessment of the applicant's true cost of borrowing.Originality/valueEven though it is known that the after‐tax APR decreases as an individual's marginal tax rate increases, no explicit formula existed for determining the after‐tax APR. This is the first such formula. Thus, this formula will help the consumers in the mortgage market to be more informed in their decision‐making process.

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Section: Closing Commentsmentioning

confidence: 99%

“…These laws require, among other things, creditors to quote an APR or its equivalent. Recent international studies, however, have questioned the usefulness of the APR for comparing mortgages because borrowers show a lack of understanding of the APR; see, for example, Buch et al (2002) and Yard (2004).…”

Section: Notesmentioning

confidence: 99%

A formula for the after‐tax APR for home mortgages

Ramsay

Oguledo²

2005

Intl Jnl of Bank Marketing

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“…As mentioned above, the borrower gets two pieces of information about a loan, the APR and in a specific situation also the FC. A well‐known problem is that many consumers find the APR hard to understand or to rely on (See Buch et al , 2002; Lee and Hogarth, 1999; Kimball et al , 1997; and Chang and Hanna, 1993). On the other hand, FC is not a good cost indicator: even if it is quite obvious that the FC will increase for a larger loan of greater duration, this fact is not always taken into account.…”

Section: Apr: Well‐established But Difficult To Understand For Non‐specialistsmentioning

confidence: 99%

Consumer loans with fixed monthly payments

Yard

2004

Intl Jnl of Bank Marketing

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Consumers tend to have problems interpreting cost information, such as the annual percentage rate (APR), pertaining to loans. Students were used to test people's spontaneous estimates of loan cost when only the payment pattern was known, but not the APR or the total finance charge (FC). Experiments show that some absolute measures such as the FC seem to be used rather than relative measures when ranking loans. This leads to a bias against loans of longer duration. This can be avoided by using a heuristic, an approximate APR, by a simple development of the FC. The last section examines the problem of estimating the duration change when the interest rate is altered. Experiments show that the duration is generally underestimated when only the payment pattern and the interest rate are known. If the FC per month is known the situation improves somewhat, but still the effects on the duration of changing interest rates are underestimated.

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Is APR a Robust Measure of the Cost of Consumer Credit?

Osborne

2014

Multiple Interest Rate Analysis

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The usefulness of the APR for mortgage marketing in the USA and the UK

Cited by 5 publications

References 4 publications

A formula for the after‐tax APR for home mortgages

A formula for the after‐tax APR for home mortgages

Consumer loans with fixed monthly payments

Is APR a Robust Measure of the Cost of Consumer Credit?

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