November 25th, 2015 6:35 AM by Jackie A. Graves, President
A lower APR doesn't
always equate to a better deal.
When shopping for
home loans, borrowers are usually most concerned with the annual percentage
rate (APR) offered by a mortgage lender, rather than simply the interest rate,
since the APR is meant to provide a more complete picture of how much a loan
will truly cost. After all, APR calculations take into consideration all of the
fees associated with loans, in addition to mortgage interest rates, which makes
finding the best mortgage really easy; the lower the APR, the better the
it's true that the APR on a home loan is a more comprehensive representation of
how much that loan will cost you year-over-year. However, you should not trust
the APR alone for an accurate understanding of it's true cost. Why? There's no
standard governing which fees have to be included in an APR, essentially
allowing lenders to choose what goes into the calculation, and what doesn't.
Not to mention, the calculation itself is based on a number of assumptions that
often don't hold true.
why when choosing a lender to finance your home purchase, your ultimate
decision should not be based on the APR alone. Learning to scrutinize a mortgage lender's fees is crucial in avoiding being duped
into paying excessive charges for a mortgage.
Does "Annual Percentage Rate" Mean?
case of a mortgage, the annual percentage rate, or APR, is the total yearly
cost of financing a home, expressed as a percentage of
the amount financed. So for instance, say you are quoted a mortgage APR of 3.8
percent—that means if all the interest, points, and any other closing costs
were added up, and then that sum was spread evenly across the entire loan term,
annual payments on that total would equal 3.8 percent of the original loan
seem a bit complicated, but the federal government actually began requiring
lenders to provide an annual percentage rate alongside any advertised interest
rate in order to simplify the process of home loan comparison shopping. A
result of the Truth in Lending Act, the requisite to provide an APR is meant to
give potential borrowers a more comprehensive benchmark by which to compare
mortgages. Unfortunately, that goal is often not met.
APR Can be a Misleading Number
several APRs in search for the most affordable mortgage may not always be an
apples-to-apples comparison. The problem is that there is no standardization of
what is to be included in the APR calculation. Lenders may choose to include
some fees as part of the APR, while others are kept separate, and third-party
fees like title and appraisal fees are always left out. Plus, while there are
some typical settlement charges that don't deviate much in cost (like taxes),
other closing costs vary from lender to lender, and the APR gives no indication
as to which charges are negotiable or simply too high.
closing costs are amortized over the entire loan term. The APR is calculated on
the assumption that you won't sell your home before the mortgage is fully
repaid, pay the loan off early, orrefinance, and doesn't take inflation into
consideration at all. And if you're obtaining an adjustable rate mortgage, the
APR is a truly meaningless number because you can't predict what the future
interest rate will be once the loan resets.
Best Way to Evaluate Mortgage Costs
not to say that the annual percentage rate is not a useful number for comparing mortgages—the APR is a good starting
point for narrowing down potentially attractive offers. However, because it's
not always the most accurate representation of a mortgage's affordability, it's
important to learn how to dig deeper and really understand the true cost of any
loan before committing.
you are quoted an APR on a mortgage and you're serious about pursuing that
offer, ask to see the lender's Good Faith Estimate (GFE). The GFE is a list of
all the fees that would be charged to provide you a home loan, including the
charges that would otherwise not be included in the APR. Lenders are required
to provide this information without any commitment from you.
mind that it is an estimate, and total charges may end up a bit higher or lower
at closing. Even so, the GFE will let you view all fees, item by item, and
identify any instances of overcharging or "junk fees" the lender may
try to slip past you.
loan is probably the biggest financial liability you'll ever take on in your
lifetime, so make sure you aren't paying any more than necessary. It's easy to
be wooed by low rates, but know that an offer that seems too good to be true
probably is, and you have the ability to find out for sure.
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