Should I compare mortgage APRs?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
tomwood
Posts: 812
Joined: Mon Dec 10, 2018 9:34 am

Should I compare mortgage APRs?

Post by tomwood »

When shopping rates for the best home mortgage package, should the comparison be between everyone’s APR?
senex
Posts: 810
Joined: Wed Dec 13, 2017 4:38 pm

Re: Should I compare mortgage APRs?

Post by senex »

As a starting point, yes. APR is a standard formula that reflects all real costs, should you hold the loan to its full term. It cannot be gamed in the same way that interest rate can be gamed.

If you expect to refinance or sell before the loan's term, your personal costs may be lower with a loan that has somewhat higher interest rate and lower closing costs, even if its APR is higher than the alternative.

Unscrupulous brokers sometimes say "look at the actual interest rate, that is what you're actually paying." They say this to hide the fact that the high origination fees/points increase their own commission, and are a *real* cost to you. If you have two loans, A and B, where B has higher APR and lower interest rate, then B will pay the broker more, and be more costly to you, regardless of how long you hold it. That is why the law requires disclosure of APR.
Topic Author
tomwood
Posts: 812
Joined: Mon Dec 10, 2018 9:34 am

Re: Should I compare mortgage APRs?

Post by tomwood »

senex wrote: Tue Sep 14, 2021 9:57 am As a starting point, yes. APR is a standard formula that reflects all real costs, should you hold the loan to its full term. It cannot be gamed in the same way that interest rate can be gamed.

If you expect to refinance or sell before the loan's term, your personal costs may be lower with a loan that has somewhat higher interest rate and lower closing costs, even if its APR is higher than the alternative.

Unscrupulous brokers sometimes say "look at the actual interest rate, that is what you're actually paying." They say this to hide the fact that the high origination fees/points increase their own commission, and are a *real* cost to you. If you have two loans, A and B, where B has higher APR and lower interest rate, then B will pay the broker more, and be more costly to you, regardless of how long you hold it. That is why the law requires disclosure of APR.

Thank you Senex,
Is there anything else worth my time comparing other than APR? I’m asking for quotes from 3 entities, all 30 year fixed with the same down payment. As rates are below 3% at the moment I’d say it’s quite likely I hold this note for 30 full years. Do I need to check each line of the fees typed out on the cost estimate sheet or does the APR calculate that for me?
secondcor521
Posts: 172
Joined: Wed Sep 10, 2014 4:11 pm

Re: Should I compare mortgage APRs?

Post by secondcor521 »

tomwood wrote: Tue Sep 14, 2021 2:45 pm
senex wrote: Tue Sep 14, 2021 9:57 am As a starting point, yes. APR is a standard formula that reflects all real costs, should you hold the loan to its full term. It cannot be gamed in the same way that interest rate can be gamed.

If you expect to refinance or sell before the loan's term, your personal costs may be lower with a loan that has somewhat higher interest rate and lower closing costs, even if its APR is higher than the alternative.

Unscrupulous brokers sometimes say "look at the actual interest rate, that is what you're actually paying." They say this to hide the fact that the high origination fees/points increase their own commission, and are a *real* cost to you. If you have two loans, A and B, where B has higher APR and lower interest rate, then B will pay the broker more, and be more costly to you, regardless of how long you hold it. That is why the law requires disclosure of APR.

Thank you Senex,
Is there anything else worth my time comparing other than APR? I’m asking for quotes from 3 entities, all 30 year fixed with the same down payment. As rates are below 3% at the moment I’d say it’s quite likely I hold this note for 30 full years. Do I need to check each line of the fees typed out on the cost estimate sheet or does the APR calculate that for me?
I'm not senex.

In theory, the APR calculated by the lender includes all of the appropriate fees. Most mainstream lenders probably follow the rules; an ignorant or devious lender might try to shift fees from lines on the HUD-1 which are included in APR to lines on the HUD-1 which are not. But this seems like a lot of work for questionable gain, so I don't know if it actually happens or not.

One thing you might want to note is that lenders, in their quotes, have to put estimates in for what are sometimes called pre-paids - things like property taxes, homeowner's insurance, irrigation, etc. These costs will be the same regardless of which lender you use, so it's better to separate these out of the quotes. Some lenders estimate high so you're not surprised; others estimate low so you see low closing costs and are more likely to pick them. But for apples to apples comparisons, this effect should be separated out from everything else.
User avatar
grabiner
Advisory Board
Posts: 30397
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Should I compare mortgage APRs?

Post by grabiner »

tomwood wrote: Tue Sep 14, 2021 2:45 pm Is there anything else worth my time comparing other than APR? I’m asking for quotes from 3 entities, all 30 year fixed with the same down payment. As rates are below 3% at the moment I’d say it’s quite likely I hold this note for 30 full years. Do I need to check each line of the fees typed out on the cost estimate sheet or does the APR calculate that for me?
Make sure you are comparing apples to apples, such as comparable points. The APR for a loan with points assumes that the loan will be carried to term. Since you might pay off the loan early (say, if you sell the house), you would prefer fewer points given a particular APR. If you intend to pay a lot of points to get a lower rate, you might make a comparison on loans offering as close to 2 points as possible, and interpolate if needed (that is, if one lender offers 1.5 points at a 2.75% rate or 2.5 points at a 2.625% rate, then 2 points would in theory be a 2.6875% rate).
Wiki David Grabiner
User avatar
Nate79
Posts: 7457
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Should I compare mortgage APRs?

Post by Nate79 »

The refinance mega thread has a lot of useful info for shopping mortgages.

viewtopic.php?f=2&t=289559&p=6226497#p6226497
Topic Author
tomwood
Posts: 812
Joined: Mon Dec 10, 2018 9:34 am

Re: Should I compare mortgage APRs?

Post by tomwood »

grabiner wrote: Tue Sep 14, 2021 9:39 pm
tomwood wrote: Tue Sep 14, 2021 2:45 pm Is there anything else worth my time comparing other than APR? I’m asking for quotes from 3 entities, all 30 year fixed with the same down payment. As rates are below 3% at the moment I’d say it’s quite likely I hold this note for 30 full years. Do I need to check each line of the fees typed out on the cost estimate sheet or does the APR calculate that for me?
Make sure you are comparing apples to apples, such as comparable points. The APR for a loan with points assumes that the loan will be carried to term. Since you might pay off the loan early (say, if you sell the house), you would prefer fewer points given a particular APR. If you intend to pay a lot of points to get a lower rate, you might make a comparison on loans offering as close to 2 points as possible, and interpolate if needed (that is, if one lender offers 1.5 points at a 2.75% rate or 2.5 points at a 2.625% rate, then 2 points would in theory be a 2.6875% rate).

grabiner,
Is the APR a formula only calculating the interest rate and points? If I had two loans, both 30 year fixed and both with 0 points and both 3% rates, would the APRs be identical, or are there other fees included in the APR such as loan origination, etc?

Maybe asked another way, if I had two loans with the same interest rate, same 30 year fixed, both 0 points, and the APRs were different, is the lower APR my better selection, or might there be other ‘hidden’ fees not included in the APR?
senex
Posts: 810
Joined: Wed Dec 13, 2017 4:38 pm

Re: Should I compare mortgage APRs?

Post by senex »

tomwood wrote: Wed Sep 15, 2021 1:25 pm Is the APR a formula only calculating the interest rate and points?
APR includes most fees related to the loan itself, but excludes some things that are not part of the loan itself (like escrow payments for property taxes), and excludes a few things that are expected to be minor. See, for instance, the list here: https://centralcoastlending.com/the-loa ... n-lending/
MrJedi
Posts: 1066
Joined: Wed May 06, 2020 11:42 am

Re: Should I compare mortgage APRs?

Post by MrJedi »

Your should look at the interest rate (not APR), term length, and then also look at the individual sections of each Loan Estimate to compare different options. Some sections in the Loan Estimate are not really true costs of the loan. For example, you might need to prepay property tax into your loan closing, but that's a fixed cost you need to pay anyway, it's not truly a cost associated with the loan.
fallingeggs
Posts: 158
Joined: Sat May 04, 2019 7:11 am

Re: Should I compare mortgage APRs?

Post by fallingeggs »

Rather than comparing the disclosed APR, one should recalculate it using a shorter term, like 10 years (being closer to the actual time you will likely have the loan outstanding). This way you won’t get tricked by points/broker fees the may result in a lower APR over 30 years but a higher rate over 10.

This does take some math, but some googling and Excel will get you there.
User avatar
grabiner
Advisory Board
Posts: 30397
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Should I compare mortgage APRs?

Post by grabiner »

fallingeggs wrote: Wed Sep 15, 2021 3:40 pm Rather than comparing the disclosed APR, one should recalculate it using a shorter term, like 10 years (being closer to the actual time you will likely have the loan outstanding). This way you won’t get tricked by points/broker fees the may result in a lower APR over 30 years but a higher rate over 10.
If one point gives a 0.125% reduction in interest rate, this would be about break-even after ten years. You pay 1% of the full balance up front, and each year, you save 0.125% of the current principal. The break-even would be eight years if you saved 0.125% of the full loan balance and the time value of money were ignored, but it is longer both because the balance declines over time and because every dollar paid up front would be also slightly reduce interest payments if it had been used to increase the down payment instead.
Wiki David Grabiner
MrJedi
Posts: 1066
Joined: Wed May 06, 2020 11:42 am

Re: Should I compare mortgage APRs?

Post by MrJedi »

tomwood wrote: Wed Sep 15, 2021 1:25 pm
grabiner wrote: Tue Sep 14, 2021 9:39 pm
tomwood wrote: Tue Sep 14, 2021 2:45 pm Is there anything else worth my time comparing other than APR? I’m asking for quotes from 3 entities, all 30 year fixed with the same down payment. As rates are below 3% at the moment I’d say it’s quite likely I hold this note for 30 full years. Do I need to check each line of the fees typed out on the cost estimate sheet or does the APR calculate that for me?
Make sure you are comparing apples to apples, such as comparable points. The APR for a loan with points assumes that the loan will be carried to term. Since you might pay off the loan early (say, if you sell the house), you would prefer fewer points given a particular APR. If you intend to pay a lot of points to get a lower rate, you might make a comparison on loans offering as close to 2 points as possible, and interpolate if needed (that is, if one lender offers 1.5 points at a 2.75% rate or 2.5 points at a 2.625% rate, then 2 points would in theory be a 2.6875% rate).

grabiner,
Is the APR a formula only calculating the interest rate and points? If I had two loans, both 30 year fixed and both with 0 points and both 3% rates, would the APRs be identical, or are there other fees included in the APR such as loan origination, etc?

Maybe asked another way, if I had two loans with the same interest rate, same 30 year fixed, both 0 points, and the APRs were different, is the lower APR my better selection, or might there be other ‘hidden’ fees not included in the APR?
Interest rate and fees separately is the right way to compare, IMO. Other things go into APR that make it less of an apples to apples comparison. For example if one loan funds on the 5th of the month vs another on the 25 of the month, with everything else equal, the one that funded on the 5th will show a higher APR because more prepaid interest is paid, but really the only difference is that you just had the money loaned out for a longer time and technically paid a little more in fees/interest.
Post Reply