There are two different rates we’ve always been told to look for when shopping for a mortgage. The first is the Mortgage Interest Rate, which is the rate of interest that will determine your monthly payment. The second is the Annual Percentage Rate, more commonly referred to as the APR.
Many people have come to believe that a loan’s APR, is the single most important factor in comparing mortgage loans. However, this is rarely the case, especially in today’s marketplace,” explains Bob Peckenpaugh, Manager of CFIC Home Mortgage. Analyzing the APR during mortgage refinancing or second mortgage loan shopping can be a very tricky proposition.
The Annual Percentage Rate is defined as “the cost of consumer credit as a percentage spread out over the term of the loan.” Most consumers have no idea what makes up this elusive number. The APR is a valuable tool in comparing various mortgage loan programs, but it should never be relied upon as the sole determining factor in choosing a loan, for the following reasons:
1) Not all closing costs are calculated within the APR uniformly. According to Peckenpaugh, “There is a huge variance among lenders, mortgage loan officers, and even states on which fees they include in their APR when calculating the loan. There is no standard among the mortgage industry, let alone among competing mortgage companies.”
2) The costs themselves can be manipulated within the loan. For example, prepaid interest (the amount of pro-rated interest a consumer pays at closing for interest which will be earned from that date until the end of the month) can be represented as anywhere from 1 to 30 days, a potentially huge difference, especially on larger mortgage refinancing loans.
3) Manipulation of the title fees. Ordinarily, the title company’s settlement or closing fee is an APR fee, while their title insurance cost is not. Peckenpaugh explains, “recently, in order to minimize the effect to the APR, title companies began simply decreasing their closing fee, while subsequently increasing their title insurance fee by the same amount, thereby reducing the APR.”
4) Lack of industry awareness of what is accurate. Most mortgage loan or refinancing officers do not intentionally try to mislead, but inaccurate information could result in the consumer making a poor decision.
As opposed to APR, consumers would be better served by asking the following simple questions.
1) What is the mortgage interest rate?
2) What is the total mortgage loan amount?
3) What is the monthly mortgage payment (principal and interest)?
4) How much are the closing costs?
Under new guidelines issued in 2015, within three days of applying for a mortgage, the borrower will receive a Loan Estimate Form that discloses all of the estimated costs of the loan, including taxes and insurance.
If you have any questions about anything written here, feel free to contavt me, I will be happy to clarify things for you.
Lester Bleich, New York State Licensed Mortgage Loan Originator 