APR

You see them on billboards…you see them in newspaper ads…you see them advertised on television - the ubiquitous mortgage interest APRs (Annual Percentage Rates). Though originally intended to be an objective way of comparing rates, the "lowest" rate does not always tell the whole story, nor does it necessarily mean it is the best deal.

Every potential borrower should understand that, for different reasons, mortgage interest rates can vary from state to state and lender to lender. APR listed rates can also vary, and may not actually reflect a true apples-to-apples comparison between lenders.

Nearly 30 years ago, federal regulators wanted to help consumers by giving them a better and more accurate way of comparing interest rates and loan costs between lenders. Under the Truth-in-Lending Act, lenders were required to give Annual Percentage Rates to consumers as a more accurate way of shopping for the best and lowest interest rates.

At the time, loan packages were becoming increasing more complicated, and the government wanted to both help and protect borrowers. With the implementation of the Truth-in-Lending Act, the consumer can achieve a better understanding of interest rates and more accurately determine which loan package suits their needs. By law, federal regulations require that every mortgage be calculated with an APR and have it clearly stated in any loan agreement.

As part of the loan application process, borrowers will be given a Federal Truth-In-Lending Disclosure form. On this form, the consumer will find both the "note rate" and the Annual Percentage Rate. The note rate will be the initial, or basic, interest rate used in helping to calculate the monthly mortgage payments. The APR will be slightly higher because it includes other items connected with loan costs.

The elements that affect an APR, as noted, are regulated by the federal government. Generally, the APR includes all financing costs that would not apply if the consumer were to purchase the home by paying cash instead of using credit.

In addition to the note rate, the APR may also include points, origination fees, mortgage insurance premiums and other closing costs. These numbers are combined and calculated into one figure and listed as the APR. This can be defined as the cost of credit to the borrower in relation to the amount borrowed, and then expressed as a yearly rate.

However, over the years, the use of APRs has evolved in such a way that they don't always tell the same story. That is why comparing one lender's APR to that of another, and then choosing the loan package just based on the "lower" APR may not actually benefit the borrower.

Lenders can, in fact, legally use different methods of calculating an APR, and this is within the established government guidelines. In some cases, this can lead to an APR being listed at a rate that is lower than the actual financing costs. Under some circumstances, the government allows lenders to exclude appraisal fees or private mortgage insurance (PMI) as part of the APR. Lenders may also vary on whether to include credit insurance or loan application fees in these figures.

These differences have nothing to do with lenders being anything less than honest. It's just that the lenders are allowed a certain amount of flexibility under the guidelines.

But the net effect of these differences is that the APRs can vary as well. Therefore, a comparison of the listed APRs between lenders may not be the most accurate way to evaluate the best loan package. Don't shop lenders or interest rates solely based on the APR listings. Always have the lender explain all elements and costs that are included in the quoted APR.

APRs can be very helpful when used and interpreted properly, but they can also be confusing. Please call us if you have any questions. This could also be a good time to review your current mortgage loan.