From one of the most qualified mortgage experts out there--Jeff knows his stuff! A wonderful explanation on how to shop mortgages!
Shopping mortgage rates can be confusing, especially if you are dealing with a loan officer that has no integrity. It's just a sales job to them. You hear people say... Shop Rate...Shop APR (Annual Percentage Rate)….. Shop mortgage fees….. So which is it? Shopping for a mortgage can be very frustrating also to say the least. I hear so many called experts tell the average consumer to shop APR. This is not the wisest of decisions and can be argued by many professionals. Keep in mind, this is my opinion on this subject.
Lets add some more confusion. Most of us know what the rate is in regards to mortgages. Lets define rate and APR. Rate : A charge or payment calculated in relation to a particular sum or quantity: interest rates. (from answer.com) APR (Annual Percentage Rate) : Is the cost of your credit expressed as an annual rate. This is a federally required formula, designed to help the borrower compare the cost of credit. The APR rate is different from the note rate of your mortgage and is usually higher than the note rate. Why is this?
The APR rate is usually different than the mortgage rate because the APR includes certain fees which are calculated into the actual rate. The problem with this is that so many people tell you to use the APR as your measuring tool when shopping with other lenders. And each lender by law is suppose to send you a Truth in Lending disclosure which shows you the APR.
So why does comparing one companies APR with another can be misleading or incorrect? Because the lender is suppose to include certain fees in this calculation. Not only do some companies leave some of these fees out, but there are other fees that don't have to be included that some lenders might include and the rules are not clearly defined. Sound confusing? Yes and I will talk about this later.
So, what fees are included in the APR?
These fees are generally included :
- Points – both origination and discount
- Underwriting, loan processing, and document prep fees (these are generally true junk fees)
- commitment fee
- attorney and or title closing fees
- PMI (private mortgage insurance) or MIP for FHA (Mortgage insurance premium) financed
- Prepaid interest - Interest that is paid from the time that you close to the end of the month. The problem here is that some lenders put 1 day or 5 days down on your good faith estimate. Even if they don't know your closing date.
Sometimes included :
- Application fee
- Tax related service fee
Generally not included :
- Appraisal fee
- Credit report fee
- Title fee
- Recording fees
Conclusion : The overall function of the APR is to measure the ‘true cost’ of the loan. Its suppose to create fairness and a level playing field amongst other lenders. Getting back to why I think comparing APRs from different companies is a bad idea. As mentioned, some lenders don't know how to compute the APR. Others leave out certain fees that should be included. Lastly, many lenders use programs that help compute the APR and it doesn't matter if you are applying for a FHA loan or a conventional loan. Not all of these APR programs are the same. Blame this on the government for not making it all the same.
Another issue about the APR is that it's based on the length of that mortgage. If you are applying for a 30 year mortgage, it will be based on 365 months. Keeping in mind that the average person moves out of their house in 6.7 years and or would refinance their mortgage in 4 to 7 years. Overall, it's extremely rare that someone would keep that same mortgage for the length of that loan, the term of that mortgage.
My opinion? Use the TIL (Truth in Lending disclosure) as a helpful tool to ask questions why it might be higher or lower than another companies disclosure. But go back to the good faith estimate as your real tool. Why? Because all fees are supposed to be shown on this form. I would compare rate, term, and fees and here is a good example of this. Shopping Good Faith Estimates. (FYI - compare the same programs) Just one word of advice, not every loan officer will be truthful when it comes to the good faith estimate. Some lenders will not show all costs or confuse you by mixing up the different costs. *** And remember this, most of the costs are 3rd party charges which are estimates. You need to decipher what these are in order to shop accurately. Finding a trusted mortgage consultant is very important.
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