Comparing Home Loan Rates
Is comparing APRs (Annual Percentage Rate) the best way to decide which lender has the lowest mortgage rates and fees?
In a word, no.
The Federal Truth in Lending law mandates that all mortgage lenders disclose the APR when advertising a loan program and rate. The APR is supposed to represent the actual cost of the financing over the entire term of the loan by requiring that most (but not all) of the closing costs are included in the APR calculation.
But, since most homeowners nowadays do not keep a mortgage loan for the entire term, APRs are not a truly accurate measure of actual loan costs.
What lenders may not tell you about loan fees
An advertised APR doesn’t have to include all of the closing fees, and lenders trying to lure you into low-cost, low-rate mortgage loans often severely limit which fees they include (often just their own) to create the appearance of offering the best loan. Also, fees for items like an appraisal and credit report are not necessarily included because even though these are part of the costs for obtaining a home loan, most lenders require that the borrower pay these items in advance.
For adjustable rate mortgages, the APR can be even more misleading. Since no one knows exactly what market conditions will be in the future, assumptions must be made regarding future rate adjustments and these may or may not come to pass as expected.
Comparing home loan rates
The bottom line here is that you should not put much stock in an APR figure when shopping for the loan program that’s best for you. We can customize a written mortgage analysis that compares different loans, total fees, possible rate adjustments and more, so it helps you make the right decision for the best home loan based on a number of different factors, not just APR.
Finally, remember that the APR is an “effective” interest rate — not the actual interest rate of your Note. Your monthly payments will be based on the actual interest rate, the loan amount, and the term of the loan.