APR on this loan?

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Question:

I have an interest only construction loan with interest charged on the amount disbursed where 92% of the loan proceeds are disbursed at closing. The usual construction loan APR calculation makes the APR come out very high. Is there an alternative method for calculating the APR? I am having difficulty understanding the actuarial method in Appendix J of reg Z.

Answer:

What you want to look at is Appendix D to Reg. Z. Use that concept but be careful. It computes under the assumption that half your funds are always outstanding. You already know that 92% will be and should adjust your math accordingly or you will mislead the borrower with an understated finance charge, even though it is a known estimation.

If you have access to ABA Compliance Magazine archives or want to study this, get reprints from the ABA of these articles.

Construction Loan Disclosures: Some Light at the End of the Tunnel, Alan Dombrow and Fern P. Prosnitz, October/Autumn 1994, p. 31.
Construction Loan Disclosures Under Regulation Z: An Instructional Guide, Timothy R. Burniston, Autumn 1985, p. 13.
Construction Loan Disclosures Under Regulation Z Revisited, Alan J. Dombrow, October/Autumn 1989, p. 9.

First published on BankersOnline.com 6/06/05