It can be hard to figure out the APR when shopping for a mortgage refinancing or second mortgage loan. "Many people think that the "Annual Percentage Rate" (APR) of a loan is the most important thing to look at when comparing mortgage loans. But this doesn't happen very often, especially in the market today "Manager of CFIC Home Mortgage Bob Peckenpaugh tells us more.
Annual Percentage Rate is defined as "the cost of consumer credit as a percentage spread out over the length of the loan." Most people don't know what goes into this hard-to-find number. APR is a good way to compare different mortgage loan programmes, but it shouldn't be the only thing you use to choose a loan for the reasons below:
- The APR doesn't take into account all closing costs the same way. Peckenpaugh says that, "There are a lot of differences between lenders, mortgage loan officers, and even states when it comes to how they figure out the APR. There is no standard in the mortgage business, let alone among mortgage companies that compete with each other."
- People in the industry don't know what's true. Most mortgage loan or refinancing officers don't try to trick people on purpose, but giving them wrong information could lead them to make a bad choice.
- Changes to the fees for the title. Most of the time, the settlement or closing fee charged by the title company is an APR fee, but the cost of their title insurance is not. Peckenpaugh says, "Recently, in order to keep the APR from going up too much, title companies have been lowering their closing fees and raising their title insurance fees by the same amount." This makes the APR go down.
- The loan makes it possible to change the costs themselves. For example, prepaid interest (the amount of pro-rated interest a consumer pays at closing for interest that will be earned from that date until the end of the month) can be shown as anywhere from 1 to 30 days, which can be a big difference, especially on larger mortgage refinancing loans.
Instead of looking at the APR, it would be better for people to ask the following simple questions.
- What is the monthly payment (principal and interest) on a mortgage?
- How much is the mortgage loan as a whole?
- What is the interest rate on a home loan?
- How much will it cost to close?
In most cases, the mortgage loan refinancing officer can give you a written estimate that includes all of the above. This is called a "Good Faith Estimate" or a "Truth in Lending Statement." Then, you can compare these documents from different mortgage lenders to see if your quotes are real and correct. To find out more about mortgage financing or refinancing, call 1-800-943-9472 and ask for Bob Peckenpaugh, Manager, CFIC Home Mortgage.
