One of the worst ways to compare loans, in my opinion, is to shop the “APR” or Annual Percentage Rate. The APR is an expression of the effective interest rate that will be paid on a loan, taking into account certain one-time fees and standardizing the way the rate is expressed. While the formula can be complicated, the underlying foundation is made up of the interest rate and any service-related fees being charged on a loan. Examples of service-related fees would be processing, underwriting, and closing fees. Items such as appraisal reports, credit reports, and title insurance are tangible reports and therefore are not considered finance fees and don’t go into the APR.
The APR is intended to make it easier to compare lenders and loan options. One should be able to call and inquire as to what a lender’s APR is and go with the lowest one. Unfortunately, despite repeated attempts by regulators to establish usable and consistent standards, the APR does not represent the total cost of borrowing nor does it really create a comparable standard. Some lenders will manipulate the APR, either intentionally or unintentionally by omitting certain fees from the APR, thus reducing the rate.
The best way to find the lowest rate and cheapest closing costs is to ask just that. By asking a lender to break those out separately, you can better analyze and size up their offer. As I mentioned in my previous article “Let’s Go Shopping”, requesting a Good Faith Estimate is the best way to accomplish this.
- Are Points Tax Deductible?
- Bi-Weekly Mortgages, Are They Worth It?
- Higher Rate, Lower Fees or Lower Rate, Higher Fees?
- How Recent Market Changes Can Affect You
- Rates Are Based on Your Credit Score and Equity
Gregg Harris has written 16 articles on LenderCity
