APR - Annual Percentage Rate

The government, consumer groups, and mortgage lenders are working, with little luck, to come to agreement on how to change the Truth-In-Lending Act (TILA) and the Annual Percentage Rate (APR) calculation, changes that, ostensibly, are designed to help mortgage shoppers.

But even Consumer Reports Magazine says the APR "is of little value as a mortgage-shopping tool." As a mortgage broker for eight years, holder of three of our industry’s credentials and candidate for a fourth - the highest - and as the teacher of the Smart Homebuying class at the local community college for the past six years, I can tell you Consumer Reports, as usual, is right. But, frustratingly, the magazine is calling for changes in the way the APR is calculated rather than calling for it to be scrapped altogether. The fact is, I don’t think we will ever be able to ease the unhealthy fixation consumer advocates have on the APR as a valuable tool for borrowers.

In a recent edition, Consumer Reports admitted that homebuyers have known for three decades that the APR is of little value. In fact, borrowers already have a way to shop for a good deal, which I discuss a little later in this column. I believe any efforts to somehow try to make the APR of value will result in few benefits to consumers.

The mortgage industry has suggested just doing away with the APR in the mortgage transaction, and I agree, while some consumer advocates, with whom I generally agree on most issues, think the APR computation method is broken. Well, it is. But fixing it still won’t help mortgage shoppers. Why fix something that, when fixed the way you want it to be fixed, will still have no value to the consumer? The reason the APR calculation is of limited value is different lenders include different closing costs in the APR calculation. Sadly, frustratingly, neither the mortgage industry’s own leaders and teachers nor banking regulators have ever been able to make clear to those of us in the trenches just what to include in the computation and what to exclude, leaving us to err on the side of caution and include more than we ought to. This theoretically leaves the ethical among us in a disadvantageous position as shoppers compare our APR to the disclosed APR of some of our less-than-honest competitors, who take advantage of the situation, hiding behind the confusion, claiming that they didn’t know what should be included. Of course, that is only theoretical, since no mortgage shopper out of the thousands I have encountered in the past seven years – not one – has ever asked me my APR. They want to know my interest rate and my closing costs. They have somehow learned the right questions to ask, and they know asking about the APR is not one of those questions.

The theory, as you may know, is the APR is a way to compare apples to apples. Well, its not, it can’t be, because, as noted above, there are different ways lenders can compute the APR and, also as noted above, no one seems to be able to give a clear answer as to what to include in the APR computation and what to leave out. There is, however, an easy way to compare different mortgage loans - do what I tell my customers and students to do: get the day’s interest rate (and points, if any) quote from three or four mortgage brokers and ask each of them to fax you a copy of a Good Faith Estimate (GFE) for your particular loan. Then, lay them all out on the table, and compare them. The items are all numbered, they are all standardized, and they are easy to compare. If there is an item you don’t understand you need only call the mortgage broker who supplied the GFE on which the item appears and ask for an explanation or ask that you be sent the free booklet called "Settlement Costs." True, interest rates can change at any time, but the items on the GFE will not vary much if at all just because the rate changes. All this talk about fixing the method of APR computation is a solution in search of a problem. Obtaining a lender’s APR is not now and never will be the way to shop for a mortgage. You want truth in lending? Well, there already is truth in lending, and here is how to get it: First, understand that the mortgage broker works for him or herself and not for you - you are a customer, not a client. Then, armed with this understanding, do what I recommended earlier: get the day’s interest rate/points quote, ask the mortgage broker to fax you a copy of her or his Good Faith Estimate, compare the GFEs side by side, then bring the GFE to the closing table and compare it with the actual closing costs (or, better yet, compare the GFE to the HUD-1 Settlement Statement twenty-four hours before closing as I encourage and as federal law allows). If you find significant, unexplainable differences between the GFE and the HUD-1, scream bloody murder and threaten to sue, notify the banking commission, or stop the closing if the costs vary by more than a few dollars. Threatening to snatch a sales commission out from under a real estate agent’s or mortgage broker’s nose is a sure way to get their attention.

So, be aggressive about shopping for a mortgage. Just don’t rely on the APR to help you get a good deal.