Comparing mortgage offers can be an intimidating task. When you shop for the best mortgage it is important to compare more than just the interest rate. The Annual Percentage Rate (APR) is a good starting place for comparison shopping.
Annual Percentage Rate
The Annual Percentage Rate factors in the interest rate and other fees associated with borrowing over the duration of the mortgage. The APR does not allow you to compare closing costs from one mortgage offer to the next. The Truth in Lending Act requires lenders to display the Annual Percentage rate prominently on any loan offer. The intent of this legislation is to discourage bait and switch tactics uses by mortgage lenders; it also servers to prevent mortgage lenders from hiding fees from potential borrowers.
Comparing Loan Offers
Here is an example to show you how to compare two loan offers using their annual percentage rate. The loan offers are both for the amount of $150,000 over thirty years with a fixed interest rate.
Mortgage Offer #1: 6.5% interest plus one point and lender fees of 2%.
Mortgage Offer #2: 6.4% interest plus two points, lender fees of 2% and more due at closing.
Which is a better offer? The second mortgage offer has a better interest rate; however, you pay more at closing due to the higher closing costs. The Annual Percentage Rate is a good starting place when you are shopping for a mortgage.
A better comparison is to use the “Good Faith Estimate” that mortgage lenders are required to provide you within three days of receiving your application. The Good Faith Estimate will outline all fees including the closing costs. To learn more about your mortgage and how to avoid common mortgage mistakes, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
