APR vs Mortgage Interest Rate - knowing the differences

This is so good. 

Needless to say, I don't leave shopping for lenders up to my buyers. 

I explain to the how points work, what the fees represent, what the different items on the GFE are and once they are comfortable, I then to amortization tables for them to demonstrate. 

It's an adventure. 

Great presentation of the information Jeff.  Enjoy the 4th of July!

I love this presentation of the the way it works and what is included.  I'm going to email your post to a buyer right now to read as I think he needs to read it. 

Good common sense, no BS post, Jeff.  Shopping for a mortgage still remains an often times misleading venture that folks aren't always prepared for.  As long as our job description remains one of properly educating people about the process, it will make the lives of everyone involved easier.

LENN.... .  I have always been amazed on how many loan officers just say shop APR and good faith. As I mentioned, this is my opinion... but because I know how this all works and how on can manipulate the Truth In Lending form that has the APR, I strongly educate on how to shop with using the GFE. Now, we know these can be misleading also... but hell, you need to start some where, right?  lol  Overall, thanks for that very polite compliment. And as you stated, yes, it's an adventure and I know you help out your clients and do a good job of it.

JEN.... . thanks for that kind compliment and you have a wonderful 4th also.

TAMMY... . thank you... and yes, you can e-mail this to anyone.  And if you ever have any questions, don't hesitate to e-mail me or call me. I just love educating and helping.

JASON.... . common sense?  what's that?  lol   Yes, shopping still remains a misleading adventure at times. But that is where you and I... and some others can change all of this. Well, at least try. I know you are a stickler on educating the borrower just as much as I am. And seriously, I love to compete against another loan officer when they aren't educating their borrowers, just lying, or throwing out misleading info... and I can not only give them my opinion, but show proof, depending on what was mentioned.  thanks

Excellent post, and I'll probably cite you as an expert and link to this in the post I have in progress on a related topic for my outside blog.  Thanks, as always.

This is a form that raises more questions than any other in my initial paperwork - I tell borrowers that this is the government's attempt at simplifying the loan comparison process & as usual they've lived up to their reputation!

Good explanation of the difference people are always confused by that at the closing table when they see their note rate and their apr rate. A definition sheet should come with the TIL.

Jeff,

People need to know that the way to get a lower APR is to pay more up-front! Even then APR is only accurate if you keep the loan for it's full term! I don't know anyone foolish enough to have fully amortized a loan, we use to have mortgage burning parties, celebrating an end to 15, 20, or 25 years of hard work and struggle.  The last ones I went to were over 30 years ago.

The lowest APR is almost always the most expensive loan if you keep the loan less than 5 years! Of course most people don't have the luxury of being able to afford the up-front cost!

There's allot of good information on the "Truth in Lending" form, APR isn't part of it!

"Truth in Lending" was the most noble bill to come out of Congress since the Civil Rights Act of 1865! But Congress turned it over to HUD and all nobility, all usefulness was lost before it went into affect.

APR proves the old atage, "figures don;t lie, but lairs figure!"

"The only protection the consumer has is the personal intergty of hid Loan Originator!"

Bill

MARGARET.... . thanks as always and yes, you can use any or all of this.  thanks... and I would love to see that site.  thanks

DAN..... . I would agree with both of your statements.  Thanks for the feedback.

HEATHER... . thanks for the compliment. I think most people are always confused about the APR, even many loan officers. I hear many of them and how they explain this.  It gets very scary at times.

BILL.... . sure, there is some truth to the TIL, the Truth & Lending... but most ignore everything but the actual APR... at least this is my opinion. I am not sure if I agree about the lowest APR is the most expensive if you kept the loan for less than 5 years.  I would think it would be more expensive if you aren't paying points to buy down the rate and kept if for over 5 years. If I had a very low APR, close to the rate, in many cases, I would have a higher rate than if I paid points.  And I am going to have that mortgage for 3 years or less, why would I pay points, which means my APR is higher.  Just curious, unless I am missing something.  thanks

Great insight for the consumer to better understand the process. I completely agree that consumers need to use both the GFE and the TIL for an accurate comparison.

Isn't it sad that some good faith estimates are missing costs?!  Blows me away!  I always tell people if they are going to shop they need to shop among people they trust and get the good faith estimate. 

I also love it when I'm refused a good faith estimate......GOOD BYE!

Great read as always!  Sorry I missed you at REBarPHL

Good info for us, good info for our clients, Jeff! Don't know how you find the time to squeeze in such a detailed post, given your thriving business!

Good overview to shed some light for consumers looking for their best financing option...hopefully there will someday be a formula that keeps the playing field "obvious" if not even.

Nice job explaining how the APR is the true cost of the loan origination.  Amerisave is one of those online companies with ridiculous low rates until you look at the APR.

I find APR a hard thing for the average consumer to use to compare other financing offers.  For example... we use Point in our business.  If I don't check the box to include a particular fee in the APR... it is not calculated. Not everyone in our business gives a complete Good Faith Estimate or Truth in Lending disclosure as you mention.  It is frustrating for me let alone the consumer.

Jeff, you give invaluable information to our clients. Mortgage is the tough part, finding the right home is a breeze compared to this. It is by far what I consider to be the first and most important part of the process. We need more like you, and more who are willing to educate the public on what is right, what is wrong, what is dishonest and what is good for them.

I heard a horror story yesterday about someone who should not be getting a mortgage, yet there is someone out there getting this person in over their head, the deposit money will be history, and there are penalties that are piling up to the tune of $100 per day. I don't know where the agent is in all this, but I was horrified. The only thing that came to mind was... irresponsible ...

It is a good thing there are people out there like you!

You really do a great job, as always! Thank you.

I didnt read all the posts so Im sorry if this was covered but APR has other problems. First let me say that Im seeing a lot of self serving type posts that have sensational headlines and body. 'Crooked mortgage broker', 'Brokers will lie' etc. Most of these are BY mortgage brokers who want to point out how great and honest they are. Im sick of the negative headlining to push ones own service. It does nothing but continue the stupid myth that most brokers are predatory or liars.

APR, like HVCC and many other regs shouldnt have ever been used or it should have been better defined. If one looks through the manuals, about 20% is regs and 80% is ATTORNEYS OPINIONS of how to interpret them. We were doomed from the beginning, just like we are with the incredibly stupid HVCC and other rules?methods.

First, APR and TIL are federally required of LENDERS, not brokers, though many states require it. They cause us to become criminals. Why? The tolerances for innacuracy or very tight. No brokers have the software programmed to do APR on exotic programs. We can throw out a pure fixed rate but usually not most ARMS, graduated, etc.  Those are in the LENDERS computers for their own programs.

As others have pointed out, Ive seen no consensus in mortgage chat boards when it comes to exactly which fees are included. Also pointed out is there are several legal variables. How can a poor borrower use APR to compare apples to apples? YA CANT!

How about this---a broker/lender gives a verbal rate quote on the phone or in person. Is that against the law? Anyone know the answer?

I tell people to pay attention to TWO things. Thats all  you need.

1. base rate.

2. total cost dollars.  

One of the FIRST things I learned was the explanation of this issue and that was years ago. Funny thing, I had a closing yesterday and had forgotten to RE-Explain it to my brother (buying his 3rd house with me). I need to remember to never take anything for granted! God post and thanks for reminding us all!

INTEGRITY MORTGAGE... aka RUSSELL.. . thanks for the compliment... but I don't care for borrowers to use the TIL to compare also.  I truly think if the good faith estimate is done correctly and is accurate, that this should be the only form to use when shopping.  Buy again, this is my opinion.  Thanks for your input.

KRISTA.... . yes, it is sad when costs are missing. But even more so when you have to beg for a good faith estimate.  thanks

IRENE.... .  thanks... and how I do this... it's the why and I ignore the how. I just love to educate and give my professional opinion.  thanks for the polite compliment and for the support.

ERIKA.... . a formula in the future?  The gov't thinks this is the right formula now, so I don't see this changing any.  And if they did change or add something, I would believe it would be worse.  Just as the new changes for the good faith estimate that will be mandatory for 2010.  Too much paper work for the borrower and added confusion.  thanks

NEVIN.... . thanks, I appreciate the compliment. In regards to your comment about AmeriSave and their ridiculous rates, until you see their APR. Just the rate alone and the higher fees should be enough to make you go elsewhere.  thanks

TEAM NEWINGTON aka Todd & Erin.... . I say it's very confusing for the borrower. You give a great example when talking about Point and that you have to check certain boxes and if one doesn't, it would not be accurate.  thanks

ANDREA.... . I would also agree that the mortgage part of the real estate transaction is the most important. Some realtors would disagree....  but thanks for your kind words.  And yes, that is a sad example that you gave.  thanks for sharing...

SECURITY TRUST aka  MARVIN  ...... . you kind of lost me on the first paragraph... so moving to the next. you are wrong about brokers not having to disclose the TIL. If anything, the investor/lender that the broker would sell to, are going to be required by the investor to disclose the TIL anyhow. But curious, where did you get this from?

In regards to your statement, "how can a poor borrower use APR"???  Does it matter if the person is poor or rich?  So you lost me on that one also.

LASTLY... I disagree with the 2nd thing that you tell people to pay attention to.  Please read my good faith estimate blog. The total cost can be manipulated in many ways.  One loan officers estimate on title insurance and or escrows could be much different than the next. I tell everyone to compare rate and lines 800 to 825. Everything else can be different when estimating 3rd party charges and escrows.  thanks

RUSSELL.... . I am sure your brother forgave you.  ;o)  But overall, I think we all need to remember this when explaining the ins and outs of mortgages..  thanks

Good stuff Jeff. I always love when a potential client shows me a TIL from a competitor and the APR is obviously not correct. I still think in this day many LOs have no clue what items need to be included to calculate the APR. Have a great 4th!!

Hopefully this explanation will help people who are looking for a mortgage.  I know many people who have become frustratingly lost in this maze.

Jeff.. this is great information as many have no clue what the differences are.

Jeff,

I just have to comment on Marvin's remarkable statements! How he could be so wrong and yet come to several very good conclusions baffles me.

"First, APR and TIL are federally required of LENDERS, not brokers, though many states require it."

Truth is Reg' Z, requires any one and every one who originates loans to provided a "Good Faith Estimate" and "Truth in Lending" with in 3 days of taking an application.

"They cause us to become criminals. Why? The tolerances for innacuracy or very tight. No brokers have the software programmed to do APR on exotic programs."

Criminal? Only if you lie and/or bait an switch! The tolerances are 1/4 point for ARM's and 1/8 point fo fixed rates, there is no excuse for mistakes.

" We can throw out a pure fixed rate but usually not most ARMS, graduated, etc.  Those are in the LENDERS computers for their own programs."

Give me a financial calculator and I'll do your APR, if it doesn't match your computer print out, you've got a soft ware problem. Fixed rates are simply an amortization problem. ARM's require an IRR program.

Give me "Ellwood's Tables" and a slide rule an I'll come within tolerances! ARM's simply take longer. Allot longer with the slide rule! No big deal with the calculator, just a nuance.

All the loan reps' I trained could do this. I also taught 11 semesters of 100 level real estate math and my students could do it if you gave them the cost.

As to soft ware I've had it since my first computer in 1987 the old "TQS-4" working in DOS, but I was faster on my HP-38c.

"Ive seen no consensus in mortgage chat boards when it comes to exactly which fees are included" 

There is no question about what is included, perhaps you should consider the validity of the source.

Amazingly: "I tell people to pay attention to TWO things. Thats all  you need.

1. base rate.

2. total cost dollars" is excellent advice.

Marvin I'm available by the hour, by the half day, by the day, by the week as an instructor, speaker, or consultant. Have your boss call me.

Bill

Hi Jeff!  A WELL-deserved feature!  This is something that drives me nuts about some rogue clients who won't consider comparing GFE's and allowing me to review them with them before making their decision.  It can be very costly to 'shop lenders' any other way!

Have a wonderful Independence Day!

Jeff ~ This is a terrific article for those of us who get confused or who just didn't know the difference between APR and Mortgage Interest Rate. It is so important for agents and our clients to know how the process works.

Have a wonderful holiday weekend.

ROY.... . I would agree 110% that many loan officers don't know how to calculate the APR.  But I have seen many lenders that pass out GFE's that don't have the correct boxes checked in the LOS systems either.  thanks and have a great 4th yourself.

CHRISTINE.... . I hope this helps also. My biggest concern is the good faith estimate though... and those that just lie about the fees and what they cover or who gets them.  Read this one... the example is scary and sad. : Origination fees and what they mean..don't be fooled or lied to.

ROLAND... . thanks for stopping by and for the compliment.

WILLIAM aka BILL.... . I agree with everything that you said in your comment, except for one thing.  Total cost dollars... There are only 2 things that I can think this statement would apply to...  but either one of you said which "total cost dollars"...  and I assumed.  Are you talking about the total cost on the TIL or on the GFE?

I am still baffled on how Marvin could say that brokers don't have to disclose the til... I still would like to know where he got that from. As you mentioned, it's mandatory of everyone and in a 3 day period, banker or broker.  thanks

DEBE.... . thanks for that polite compliment.  It drives me nuts on how some borrowers compare GFE's also.  But then again, I put some of this blame on the loan officers, because of the stories or lies that they tell the borrower in what to look for... or just don't properly educate them.  thanks

TERRIE... . I think many, even loan officers, are confused with the APR.... and some make it worse when they don't explain the difference between the GFE and the TIL... and just for the fact that they don't educate the borrower on the GFE.  And thanks, you have a great 4th of July also.

Jeff,

Total cost on the "T in L" is easy to understand, but it's flawed! Like the "APR" it's determined over the entire term of the loan, not the more likely life of the loan. Dollars listed on the "T in L" are of no practical value!

For any given loan program (the same rate and term) it's the total loan cost not including the prepaids and third party fees as shown on the "Good Faith Estimate" that matter!

Simply put, if two lenders offer you a 5.5% 30 year fixed rate loan and the loan cost total (It's the total thats important, not the number of lines!) $5,000.00 at one and $7,500.00 at another the $5,000.00 is better!

"The only protection the consumer has is the personal intergerty of his loan oringantor!"

Bill

Jeff - 

APR is a useless measure because most mortgage bankers calculate this number differently, many manipulating the APR to show the same number as the "actual" interest rate.  NOT -  great post....

WILLIAM... .  I am going to agree 110% with you on the last part, hence why asked which 'total costs' that you were talking about.  But only the total cost of what is on the good faith estimate, that of the lenders charges and nothing more. Hence why I would disagree with Marvin's comment, because I think he is talking about total costs on the til, which can still be manipulated if not inputed correctly.  thanks for the clarification.

LEWIS.... .  Again, I agree 110%, which is why I decided to write about this again. I truly think that only the good faith estimate, in regards to the rate and lenders fees, should be the only focal point when truly shopping.  And thanks for the compliment.