The Annual Percentage Rate (APR) is the interest rate you are charged on your actual Loan Note plus some of the closing costs rolled in.
Therefore, the interest rate you actually pay on the money you borrow (which you see on the Loan Note and on your Rate Lock Confirmation) is different than the APR. This explains why the APR can be higher than the interest rate the loan officer quoted.
Lenders Disagree on How the APR Should Be Calculated
That is a polite way of saying that the sneaky lenders — which are often the more expensive lenders — choose not to roll as many fees into the APR calculation as the upfront, ethical lenders. And you might be surprised who that is!
For example, recently I saw a Truth-in-Lending Form provided by a credit union that did not include all of their lender fees in the APR. That might shock some people who think credit unions are the good guys. If you’ve read Homebuyers Beware, you know you cannot categorize good and bad lenders by the type of institution. There are good and bad credit unions just as there are good and bad banks and brokers.
Online APR Calculators Don’t Give You an Accurate Figure
“Garbage in, garbage out.” If you input the interest rate and APR into an online calculator to try to determine which loan is better, you’re not going to get an accurate conclusion — unless both lenders calculate their own APRs in exactly the same way. And I would not count on that!
There’s a company that has announced their new calculator that determines which loan is best. I could rent it for my website for about $39/month, as could others. But I would never do that, not even if it would attract more visitors. Why? Because it can be deceptive and inaccurate.
My guess is that the creators never considered that lenders do not calculate APR in the same way. They assume all lenders are honest and eager to fully disclose all their made-up, phony, nonsense, double-charges and junk fees. Not only that, but some lenders include certain third party fees in the APR and some do not. You can see the problem.
The Only Sure, Accurate Way to Compare Mortgage Loans
In my professional opinion, the best way to compare loans is to set out your printed estimates on a table next to one another, and then look at the following figures:
1) Loan amount (If lenders use different loan amounts, you must compensate for that in your comparison.)
2) Interest rate
3) Any possible points and/or discount points
4) Lender fees, such as administration fee, underwriting fee, processing fee, origination fee, doc draw fee (which is often hidden near the bottom away from their other fees), etc.
5) Third party fees that the lender controls: credit report, appraisal, flood certification, tax service, lender’s attorney if in an attorney state
6) Any possible lender credit
There is no shortcut for doing a thorough analysis. You can’t turn off your brain and punch two numbers into an online calculator and expect to get the right answer.
If it all seems too mind-boggling or if the various lenders’ cost estimates are so different that it’s confusing (which often happens), then you are welcome to use my consultation service. Simply email me your cost estimates or Good Faith Estimates. I will do a thorough line-by-line analysis and then we’ll have a telephone consultation where I explain everything and and answer all your questions. For more information, see the Review My Estimate page.