With mortgage rates at all time lows, homeowners are refinancing if at all possible! For those that are looking at refinancing or at buying a home it pays to compare rates and costs. Many people think that comparing the APR is the best way to do that – however, that's wrong unfortuantely.
Ideally every lender would calculate the APR the same way – it is a government figure meant to show the true cost of financing a home (or car, etc). When you buy a home, there are closing costs and those costs affect the APR. It is a calculation that includes the loan size plus the interest paid over 30 years plus the closing costs required for the loan. Some lenders will tell you that the lowest APR is the best deal. That isn't always true.
For the APR to be an accurate comparison tool, you need to keep your loan for 30 years – most of us do not do that. We make extra payments here and there or refinance or even sell the home within 30 years. Another big reason it is not an accurate tool is that lenders don't always calculate the APR using the same figures. If you don't include all the costs (and not all closing costs are included in the APR calculation), you will get a different figure, so you can manipulate the number to be lower than it actually is.
If you have an adjustable rate, the APR is almost a guess. The APR will look at a 30year formula and with the adjustable rate, it will usually (but not always!) use the worst case formula. That means typically they will calculate it using the highest possible rate increases with each adjustment. So that number is definitely not accurate.
So what is the best way to compare different lenders? Ask for a good faith estimate or some type of loan summary showing all the costs involved in the transaction. Ask for the interest rate. You also need to compare the interest rates at the same time. Rates change daily – sometimes hourly. You need to make phone calls at the same time to make sure you are seeing the true differences.
You need to make a decision on what is more important -the rate or the costs. If you want lower costs, you will pay a higher rate. The best comparison is to look at the costs, make sure you compare them and then look at the difference in rate. Typically a lower rate will have higher closing costs but not always.
Leslie Vanderwerf, NMLS ID#335509, Advisors Mortgage - Email – Website
