Annual Percentage Rate, or APR, is a legal requirement that mortgage lenders must disclose on one of their disclosures called a "Truth In Lending" statement. It is not a useful way for the consumer to measure the cost of a mortgage.
It is supposed to be a way for lenders to express their closing costs in terms of a percentage. The thinking is that consumers can simply ask lenders for the APR, and can quickly shop by analyzing this one number. But things are not that simple.
APR makes no intuitive sense to most consumers, it does not cover all the costs, and does not take into account differences in a consumers' time horizons, tax rates and opportunity costs. A more accurate way to measure the cost of a loan is to simply take a more involved look at the interest rate and the closing costs from the lender only. To compare loan offerings between lenders the consumer need not look at title costs, per diem interest, tax escrows or state/county recording and transfer taxes. None of these aforementioned costs is dictated by the lender or is part of the loan itself.
Let's take an example on a mortgage loan for a property in Washington, DC. Read the rest of this entry »
