Mortgage loans can be confusing and intimidating for many homeowners. Terminology like APR is not only confusing, but in the case of Annual Percentage Rate is misleading. Here are the basics you need to know about Annual Percentage Rate (APR) and your mortgage rate when comparison shopping loan offers.
Annual Percentage Rate (APR)
What is the APR and can you rely on it when shopping for a mortgage loan? Banks and mortgage lenders are required to publish the Annual Percentage Rate for their loan offers. The APR is supposed to express the total cost of the loan expressed as an annual percentage rate. This sounds like a good idea; however, Truth in Lending laws do not stipulate how mortgage lenders and banks should calculate the APR or even what fees and costs should go into the calculation.
Because there is no standard for banks and lenders to use when calculating the APR it cannot be relied on when comparing offers from one lender to the next. In order to comparison shop effectively you need to compare mortgages of the same term length and type of mortgage rate. It is also a good idea to compare rate quotes issued on the same morning or afternoon due to the volatility of mortgage interest rate.
How to Comparison Shop for a Mortgage
Because the Annual Percentage Rate is not reliable, how can you compare loan offers effectively? Comparison shopping for a mortgage can be a very difficult task because you will not have an accurate picture of loan costs until you receive the HUD-1 statement prior to closing. You can use the Good Faith Estimate to compare loan offers; however, keep in mind that this document is only as good as the person preparing it is honest.
Another problem with the Good Faith Estimate is that many mortgage brokers low ball third party settlement charges to make their offers seem more attractive. They may also leave commission based markup of your mortgage interest rate off the Good Faith Estimate completely. This is why you must reconcile your Good Faith Estimate with the HUD-1 statement before closing on your new mortgage.
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