What is APR and why should I care?

The short answer is that you should care a lot!
Don't be misled, be informed!


o APR, there's another well intended government mandated idea gone wrong. What was originally intended as a way for the consumer to compare different loans has, much like the GFE, turned into a sales hook for many brokers.

o APR, stands for Annual Percentage Rate. Most everyone knows this. This is different than your actual interest rate. The law is very clear on some issues involving APR and very cloudy on others.

o If you advertise a rate you must also advertise the APR - once again a simple enough rule.

o They were created as a tool for comparing different loans, which will include different interest rates but also different points and other terms.
The A.P.R. is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates

o While it's designed to make it easier to compare loans, it's sometimes confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.

o Let's go over that again slowly. So the APR is figured by adding the costs of the loan into the principal and then by amortizing those costs over the term of the loan, a theoretical interest rate can be computed. This is done weather the costs are financed or paid for up front.

o Here's how APR could really help you. If you came to me wanting a 30 yr fixed mortgage and I gave you two loans to choose from. One loan might sound like this, 30 yrs fixed, at 5.5% but I'll it will cost you two points. And the other one might sound like this: 30 yr fixed at 6.25% with no points, no fees. Assuming you will keep this loan over the course of 30 yrs, and all things being equal, which one represents the better loan? Once again, this is a gross generalization; the one with the lowest APR would be the best one for you. Makes sense? That's why the Feds came up with the idea of the APR.


o That's how APR can help. Now, here's how APR can hurt you. The Govt. didn't do a very good job determining what costs had to be calculated into the APR. OK, the truth is they did a horrible job. So if I know you are keying into the APR I could create one using just my costs and no others, you would have no way of knowing what was or wasn't included. Choose a loan based solely on APR and you lose.

o There's another way APR can lead you wrong. In the example of comparing a 30 yr fixed, what if you wanted a 30 yr fixed loan for the security but planned on being in the home for only 3 or 5 yrs? Wouldn't the lowest APR still be the best? Not necessarily. It depends on the spread between the two interest rates, the spread between the two costs added and the actual ending point of the loan.

o If I have a client that has future plans like that I'll compute the actual costs over the period they plan to be in the loan. Really that's what you need to look at. That's the number you really want. That's the number a good loan officer will be able to compute. If you want a loan for 30 years what is this loan going to cost you over those 30 yrs. If your loan is only for 5 years what are your costs over that term.

o Essentially APR is useless to aide the consumer in making a smart and intelligent choice.

o So what does the consumer do? How do you protect yourself? How do you compare? How do you shop? It's tough. There are so many hidden items stacked against you. So many things that you would never know. The best thing I can say is that still in this day and age, you have to trust your instincts. You have to use someone you trust. Someone who you have the confidence in. Someone who has your best interest at heart. A lot of people say they do. It's become a buzz word in the industry. But saying so doesn't mean they really do. Be careful out there. Use someone you know and trust.