There’s the interest rate quoted, and then there’s the real interest rate you’ll be paying on your mortgage. When you take the quoted interest rates and add in all the costs associated with getting that loan, a different and higher percentage number results. This higher number is called the annual percentage rate or APR for short. Federal law requires that all lenders provide the APR and a breakdown of loan costs to borrowers within three days of receiving their loan application.
In reality, this law has created a great loan comparison tool. You can have two lenders, A and B, quoting the same interest rate on the phone, say 6.0 percent. But when you get their APR statement in writing, lender A may be 6.48 percent APR and lender B 6.37 percent. This tells you that lender A’s loan is more expensive than that of lender B, and that lender A has added in more or higher fees. Different loan types generate different APR levels. For instance, FHA loan APRs are about a half-percent higher because of the built-in insurance premium than most conventional APRs quote. Likewise, a 20 percent down conventional APR is lower than a 5 percent down loan because of the mortgage insurance. So when you compare loans using APR, it’s important to compare similar programs with the same down and loan type.
For example, suppose you call two mortgage brokers and ask them to fax you a quote on a 30-year, $150,000 conventional loan with 20 percent down. Lender A tells you it has a special rate today, only 5.95 percent. Lender B tells you that today’s rates are the lowest this week and quotes 6.0 percent.
A short time later you get both lenders’ faxes. Lender A, who quoted 5.95 percent, has an APR of 6.15 percent. Lender B also comes in with an APR quote of 6.15 percent. How can this be? It all comes down to the loan fees. Lender A’s fees totaled 0.20 percent or $3,000 because it wanted the competitive low interest quote and hoped to make up the difference up in loan fees and a small buydown. Lender B, on the other hand, took a different approach. It felt that the APR would ‘‘tell the tale’’ in the end, so it might as well quote the real par rate and go with 0.15 percent loan fees or $2,250.
In reality, this law has created a great loan comparison tool. You can have two lenders, A and B, quoting the same interest rate on the phone, say 6.0 percent. But when you get their APR statement in writing, lender A may be 6.48 percent APR and lender B 6.37 percent. This tells you that lender A’s loan is more expensive than that of lender B, and that lender A has added in more or higher fees. Different loan types generate different APR levels. For instance, FHA loan APRs are about a half-percent higher because of the built-in insurance premium than most conventional APRs quote. Likewise, a 20 percent down conventional APR is lower than a 5 percent down loan because of the mortgage insurance. So when you compare loans using APR, it’s important to compare similar programs with the same down and loan type.
For example, suppose you call two mortgage brokers and ask them to fax you a quote on a 30-year, $150,000 conventional loan with 20 percent down. Lender A tells you it has a special rate today, only 5.95 percent. Lender B tells you that today’s rates are the lowest this week and quotes 6.0 percent.
A short time later you get both lenders’ faxes. Lender A, who quoted 5.95 percent, has an APR of 6.15 percent. Lender B also comes in with an APR quote of 6.15 percent. How can this be? It all comes down to the loan fees. Lender A’s fees totaled 0.20 percent or $3,000 because it wanted the competitive low interest quote and hoped to make up the difference up in loan fees and a small buydown. Lender B, on the other hand, took a different approach. It felt that the APR would ‘‘tell the tale’’ in the end, so it might as well quote the real par rate and go with 0.15 percent loan fees or $2,250.
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