Posted: Mon Apr 10, 2006 4:50 pm Post subject: why is APR higher than rate in truth-in-lending statement?
I have a doubt. I closed my loan at 6.375% rate but the Truth in Lending statement is showing APR 7%. Why is it so? _________________ Need help choosing the right loan? Get free consultation from community lenders/consultant
APR includes charges. Some of them are your finance charges, points, processing fees underwriting fees. It is more accurate to show you that how much you are going to pay. _________________ Lets help each other. Try my blog
As Blue said, in APR the interest rate is reflected including points and associated fees. It is for this reason the APR is always higher than the interest rate of the loan and the financed amount is lower than the loan amount.
This is a Great Question regarding a very confusing subject.
First of all, let's discuss what the Annual Percentage Rate (or APR) is NOT ... it is NOT the rate of interest that determines monthly payments. Your monthly payments are a function of the mortgage loan amount, the note rate of interest and the length of the loan.
The Annual Percentage Rate (or APR) is a calculated rate that is different from the actual mortgage note rate. The Federal Truth in Lending law requires mortgage lenders to disclose the APR when they advertise or disclose a rate of interest to a borrower. Typically the APR is found next to the advertised mortgage note rate or at the top of the Truth in Lending statement contained in all mortgage loan applications and/or closing loan documentation.
The APR is a very confusing number! Even mortgage professionals and attorneys admit it is confusing. The APR was designed to measure the "true cost of a loan." It is supposed to create a level playing field by preventing lenders from advertising a low rate of interest while hiding fees that are associated with the loan. Unfortunately, the mortgage APR calculation is a classic example that good intentions do not always deliver!
A loan with a lower APR is not necessarily based on a better rate and/or less fees.
A borrower who is shopping for the best mortgage rate can easily be seduced by low rate offers that are accompanied by low Annual Percentage Rates (APR). The problem is that the APR calculation makes some very bad assumptions. First, APR assumes zero inflation and that the value or buying power of a Dollar today will be exactly equal to the value of a Dollar 10, 20 even 30 years from now. Next, the APR calculation assumes that the mortgage will never be prepaid or paid off, that means no refinancing or selling the home which is highly unlikely since the average life of a home mortgage loan is less than four years. Also, the APR calculation does not consider the value of the money used for fees. So if you spent thousands of dollars in points or fees to get a lower rate, the APR calculation does not give any value to the money if it were not spent on closing costs. Finally, APR does not take tax consequences into consideration. This can be significant since higher fees on the mortgage may not be deductible while the higher interest rate typically is deductible. Moreover, APR can be manipulated by lenders, making it totally worthless.
The truth is that APR is a very poor way to comparison shop for a mortgage and can cause borrowers to make costly wrong decisions.
I personally suggest that each and every borrower comparison shopping for a mortgage simply obtain a Good Faith Estimate from competing lenders and compare the true note rate of interest along with the total fees charged against the competing offer. This is the REAL comparison you are looking for when shopping for a mortgage!
Hope this helps! _________________ Bill Clanton is a Mortgage Specialist and Manager of State Street Mortgage of Illinois. StateStreetMortgage.Net
Posted: Wed Apr 12, 2006 7:26 pm Post subject: RE:
Wow!!
Thats great explanation Bill. And I totally agree with the comparison of note rate of competing lenders. Thats the best way you can shop for a mortgage.
Helping, The IRR may be an option, however the IRR is not required to be calculated or disclosed to borrowers such as an APR. Perhaps loan shopping will get easier in the future ... until then, I feel that the Good Faith Estimate is the only effective way for most consumers to truly know which loan proposal is the best overall.
blue
