or
most people, shopping for a mortgage can be equivalent to getting
their teeth drilled. A large part has to do with the confusion that
goes along with speaking to a multitude of lenders, in an effort to
make "accurate comparisons" among various loan options,
fees, and points.
Most people rely upon mandatory disclosure rules that require
lenders to quote an interest rate, along with the Annual Percentage
Rate (APR). The inherent flaw with this method of comparing loans is
that the APR calculation relies upon arbitrary assumptions that do
not reflect the borrowers loan parameters.
For example, a typical advertised APR quote may assume a loan
amount of $200,000; a set amount of fees including points; with no
Mortgage Insurance; and holding period of 30 years. Well, if this
scenario does not apply to your home loan needs, it's a useless
number.
Secondly, the disparity between a "Note Rate" (stated
rate) and APR is not easily comprehended. For example, the
difference between a Note Rate of 8.00% and APR of 8.450% is .450.
In our example above the costs used to calculate the APR would be
$8,260.
Now if a person decided to sell the home in 5 years and pay-off
the mortgage, this APR calculation would not accurately interpret
the true cost of this mortgage. And in fact, this would be
considered a rather expensive home loan. The revised APR, or more
appropriately the Effective Rate on this loan would now be 8.935%.
So as you can see in this comparison, holding period of a home (or
loan) has a huge impact on the mortgage-rate versus fee decision.
So unless all lenders make the same assumptions when quoting a
rate and corresponding APR, it can be very difficult in making an
accurate comparison; therefore consumers should consider alternative
information when making a loan decision, and thus choosing a lender.
Some lenders engage in advertising tactics with the intent of
simply getting "the phone to ring". And because the public
has been conditioned by the Rate/APR mentality, they are induced by
ads that advertise lower rates, as compared to the majority of other
mortgage lenders. Remember, if it sounds too good to be true, it
probably is.
Surveys have revealed that some deceitful mortgage lenders have
buried loan fees in charges that are not a required part of
the APR calculation. For example, if a lender-owned escrow company
charges excessive escrow fees (which are not part of the APR
calculation), the overall costs in dealing with that lender could be
significantly higher, but not reflected in the APR disclosure. So be
sure to demand a "Good Faith Estimate" which enumerates
all fees involved with acquiring a new mortgage or refinancing an
existing mortgage.
