When comparing mortgages loans from different lenders it is important to use the Annual Percentage Rate (APR). By using this APR you will be comparing apples to apples and you will be able to choose the better loan.
The Federal government requires mortgage lenders to disclose all fees associated with their mortgage products in the form of the Annual Percentage Rate. As a homeowner looking for the best mortgage deal, you can use the APR to gage the true cost of each loan. The Truth in Lending Act was designed to prevent mortgage lenders from hiding or disguising their fees.
When comparing loans make sure you are comparing mortgages of equal term length. Mortgages with 5 year term lengths will have a higher rate because they are amortized over 15 years; 30 year mortgages have their fees amortized over 30 years. Mortgage lenders often include pre-paid interest in their APR figures; make sure you read the fine print. If pre-paid interest is included in their figures you will have to pay a certain amount up front to qualify for that rate.
Lastly, the APR from your lender doesn’t factor in penalties or balloon payments. It does not guarantee how long your interest rate will remain unchanged. APR disclosure is a good guideline when shopping for a mortgage, but it should not be your only deciding factor when selecting a 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.
