Refinancing your home mortgage loan can be an overwhelming experience for many people. New homeowners are bombarded with acronyms and jargon like APR, ARM, GFE…at times it can be too much to handle. Today I’m going to talk about the Annual Percentage Rate (APR) and the best way to comparison shop mortgage offers when refinancing.
There are many misconceptions and bad advice surrounding Annual Percentage Rate. Many people, including some financial advisors, will tell you that using the APR is the best way to compare mortgage offers when refinancing. While it’s true that Federal Truth in Lending Laws in the United States require mortgage lenders to publish a figure called “Annual Percentage Rate,” there are no standards that lenders are held to when calculating this figure.
So What is Annual Percentage Rate?
APR is a rate of interest expressed as an annual percentage that is supposed to tell you at a glance the costs of borrowing with a particular loan. The intent was to keep lenders honest when advertising their ultra-low teaser rates. Unfortunately, the Truth in Lending Law failed to protect homeowners from abusive lending practices.
The biggest problem with Annual Percentage Rate is that every lender calculates the figure differently and there are no standards lenders are required to follow when disclosing their fees. While it’s true this isn’t the lender’s fault, they certainly use this flaw in disclosure laws to their advantage. Because every lender calculates their APRs differently, relying on this figure to compare loan offers is like comparing apples to oranges and will not tell you which loan is the better deal.
How Do You Shop for a Mortgage if the APR is Useless?
There are several ways to compare loan offers before committing to a mortgage lender. One thing you need to understand about shopping for a mortgage is that you’re relying on honesty of a stranger. Shopping for a mortgage loan is a lot like shopping for a used car. Your salesperson wants you to pay as much as possible for the car because their commission depends on it. The same is true for mortgage brokers, and as you might know from stories in the news or personal experience, mortgage brokers do not have a reputation for being honest people.
There are two documents that you will encounter when refinancing your mortgage that will help you choose a lender. The first is the Good Faith Estimate (GFE). While Good Faith Estimates are flawed like the Annual Percentage Rate and are only as good as your broker is honest, they give you an itemized list of charges you can use to make a comparison. Mortgage lenders are required by law to provide you with a Good Faith Estimate upon receipt of your application; however, most will give it to you in advance if you ask politely.
The Good Faith Estimate leaves much to be desired and many originators omit or misrepresent charges to make their loan offers more attractive. You can keep this person honest using the HUD-1 statement before you sign your loan contract. You should receive the HUD statement at least 24 hours prior to closing. Your mortgage lender is required to disclose everything on this document and if the charges do not come close to what you received on the Good Faith Estimate you’ll need to have a heart-to-heart discussion with the person originating your loan before taking your business elsewhere.
You can learn more about comparison shopping for the perfect mortgage when with my free mortgage refinancing video tutorial. The videos and tools are yours free with no obligation now or in the future.