Comparing Mortgage Offers With Apr

By Author: David Reinholtz
Total Articles: 48
Comment this article

The Problem



Many home buyers don't understand the basic principles when reviewing numerous mortgage offers they receive, and for real estate agents and mortgage brokers, it can be easy to forget the complications one encounters in deciphering the right offer for them. It's a good idea to step back, take a moment, and help your clients walk through the process rather than leaving them to tackle all of that information on their own.



You can help them cut through the confusion and see the best deal, and sometimes this takes extra time. The idea is that this is not a race to the finish line, but a long-term commitment to helping home buyers make the best decision. Mortgage lenders deal with fees, points, and other loan terms on a regular basis, and it becomes second nature as a matter of the process, but all of that information can confuse and overwhelm an average home buyer.



Explaining the situation



As we all know, APR must be listed on the Truth-in-Lending statement to a client. To the average home buyer, it can be easy to ...
... misinterpret this number as the interest rate. Below is a general explanation of what APR is that may help enlighten clients when the numbers start pouring in. While APR isn't the only consideration, often it is the best gauge to weigh different offers against.



To the home buyer



The annual percentage rate, more commonly referred to as APR, combines the interest rate, lender fees, discount points, and term of the loan, or the duration, into one single number. This number is often confused with the interest rate, but it is much more and actually shows the actual cost to borrow money.



If we take two loans as an example, both worth $200,000 at five percent interest, let's assume the first loan has no fees or points to be paid. On the second loan, however, there are $$5,000 in fees and points that are included in the full amount that the borrower ultimately owes. In the second example, the borrower is actually receiving a loan of $195,000 with $5,000 in fees charged added at the beginning of the period.



When we calculate the cost of borrowing, we spread the $5,000 charge over the term of the loan that, in this case we'll say is 30 years. It rolls into the interest rate. With this calculation, the borrower is actually paying an annual rate of 5.218 percent. They are only borrowing $195,000 with $5,000 in fees, at an interest rate of 5%, so with this simple example, it can be easy to see the importance of APR in singling out the best loans.



Short versus long-term



One problem in using APR as a main focus point in determining the best loan rates is that it assumes that the mortgage will be held for the entire term. If a home buyer refinances before fully paying off the loan, then they won't have time to amortize the fees and this, in essence, raises the interest rate of their loan. When this is the case, when a client plans on refinancing or selling within 7-10 years, for example, then it's a good time to explain why choosing a loan with a higher interest rate and lower fees might be better for them.



As we all are quite aware, the loan process doesn't follow general conventional wisdom and while this information is second nature to most of us, it's important to not forget that home buyers generally view loans on interest alone, or at least as the primary focus. Many potential home buyers become frustrated and distrusting of mortgage lenders who try to guide them to a certain loan without clarifying the finer points.



With so many factors influencing home loans, breaking it down into the simplest form and explanation possible will smooth the transition from being a confused home buyer to an empowered homeowner.



David