How to Compare Mortgage Programs

To compare mortgage programs you need to look at the APR. What is an Annual Percentage Rate (APR)? The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate.

Steps

1. Look at your Truth in Lending (TIL) statement from your bank/broker. Typically the APR is found next to the rate.
   • Example:
     • Year fixed | 8 percent | 1 point | 8.107% APR
     • The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.
     • The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.
   • Ideally, one should be able to compare APRs from various lenders, then select the loan with the lowest APR.
   • Unfortunately it's not that simple. Various lenders calculate APRs differently! A loan with a lower APR may not be the best choice. A good way to compare different lenders is to ask them to provide a Good Faith Estimate of closing costs. Be sure you compare the same loan program (e.g., 30-year fixed), interest rate and rate lock period. You may ignore fees that are independent of the loan, such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Pay particular attention to loan fees. The lender with the lowest loan fees will likely have the best deal.
2. Compute the APR:
   • The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
   • What fees are included in the APR?
   • The following fees ARE generally included in the APR:
     • Points - both discount points and origination points
     • Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
     • Loan-processing fee
     • Underwriting fee
     • Document-preparation fee
     • Private mortgage-insurance
   • The following fees are SOMETIMES included in the APR:
     • Loan-application fee
     • Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)
   • The following fees are normally NOT included in the APR:
     • Title or abstract fee
     • Escrow fee
     • Attorney fee
     • Notary fee
     • Document preparation (charged by the closing agent)
     • Home-inspection fees
     • Recording fee
     • Transfer taxes
     • Credit report
     • Appraisal fee
   • Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.
3. Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.
4. Realize that many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!
5. Understand the following:
   • Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan.

   Tips

• Compare mortgage rates from many banks at once.
• Obtain your credit scores and fix any discrepancies before you apply for a loan.
• Always have the bank/broker give you a Good Faith Estimate (GFE)
• Demand in writing, a guarantee from the lender/broker that the fees in the GFE will not be more than quoted and if they are the lender/broker pays for them.
• Be certain that you are comparing exactly the same program and that the GFE's are dated the same day.