If you’re considering mortgage refinancing to take advantage of today’s low refinance rates, you might be shopping using the Annual Percentage Rate (APR) to compare offers from today’s best mortgage lenders. It’s a myth that you can rely on the APR when it comes to refinance rate shopping; it simply doesn’t work. It doesn’t matter if you’re considering traditional mortgage refinancing, FHA, VA, or even jumbo home loans, that Annual Percentage Rate is deceptive and relying on this figure can result in overpaying thousands of dollars. Here’s what you need to know to avoid this common mortgage refinancing mistake.
What is the Annual Percentage Rate (APR)?
Created by the government, the Annual Percentage Rate is intended to tell you the true cost of your mortgage, from the day you close until paying off your home loan. It is supposed to factor in the size of your mortgage, any prepaid items, closing costs and interest over the lifetime of your home loan expressed as a yearly percentage of your loan amount.
You’ll find the Annual Percentage Rate at the top of the Truth-in-Lending disclosure form. The law requires your lenders to disclose the home loan’s APR whenever giving you a quote. This law was intended to give homeowners better tools for making informed decisions when it comes to mortgage rate shopping; however, Federal Truth-in-Lending laws have been a dismal failure to his day.
If you’re looking for an apples-to-apples comparison of mortgage refinance offers across different lenders the APR is not the way to go. The problem with APR is that lenders manipulate the calculation based on their fictitious Good Faith Estimate to make their loan offers seem more attractive.
What’s Wrong With Your Bank’s APR?
One of the biggest flaws with Annual Percentage Rate is that the calculation is based on the assumption that you’ll keep the mortgage until the end of its term. The term length of your home loan is the amount of time you have to repay the mortgage. APR assumes you won’t sell or refinance before paying off your home. It also assumes you’ll only make your exact monthly payment and will never pay extra towards the principal balance.
If you ever refinance or pay a little more towards your mortgage balance the Annual Percentage Rate you used to choose the “best” offer is no longer valid. It also fails if you paid discount points when mortgage refinancing to buy down your interest rate. Points are a common ploy used by lenders to make their offers seem better than they really are.
Paying discount points on your refi only makes sense if you’re able to recoup the closing costs from your lower payment amount. If you sell or refinance again before breaking even on your out-of-pocket expenses you’re going to be losing money no matter how low your mortgage rates.
Even though you’re paying more at closing with discount points, because the interest rate will be lower, the APR on the more expensive home loan will also be lower.
This why the Annual Percentage Rate used by your bank is flawed, and doesn’t give you an apples-to-apples comparison when shopping for the best refinance companies. In fact, if you rely solely on APR you’ll wind up with a home loan with the highest out-of-pocket closing costs.
Another area where the APR fails is the third-party costs like attorney fees, title, and appraisal costs. These are subject to change on every mortgage refinance loan and are not part of the Annual Percentage Rate. Banks and lenders frequently low-ball these expenses to make their APRs seem more attractive. The Annual Percentage Rate also fails to take into consideration future rate increases on Adjustable Rate Mortgages.
How to Shop the Lowest Refinance Rates & Fees
The best way to shop for the best mortgage offer is to compare rates and all fees. Don’t rely only on the Good Faith Estimate but reconcile everything with the HUD-1 Settlement Statement. Don’t be afraid to challenge the fees you find in your loan documents. Administrative, application and courier fees are usually junk that can be avoided.
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You can learn more about getting the lowest refinance rates from lenders like Amersiave and USAA Mortgage Rates by checking out my free Underground Mortgage Videos.
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