APR is an acronym for Annual Percentage Rate.  It’s a government-mandated calculation meant to simplify the comparison of mortgage options.  It is probably the most misunderstood number at any closing or with any application.

A loan’s APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure.

Because APR is expressed as a percentage, many people confuse it for the loan’s interest rate.  It’s not.  APR represents an estimate of the total cost of borrowing over the life of a loan.  “Interest rate” is the basis for monthly mortgage repayments.  APR has nothing to do with your payment.

The concept of the APR is to allows consumers to make an “apples-to-apples” comparison between loan products.

As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees.  In this sense, APR can help a borrower determine which loan is least costly long-term.

However, APR is not without its shortcomings.

First, different banks includes different fees into their APR calculations.  By definition, this spoils APR as a choose-between-lenders, apples-to-apples comparison method.

And, second, when calculating APR, “life of the loan” is assumed to be full-term.  When a 30-year mortgage pays off in 7 years or fewer — as most of them do — APR comparisons are rendered moot.  For Adjustable Rate Mortgages, or ARM’s, the APR has to make an assumption as to what rates will do after they adjust – an impossible task that makes APR virtually useless to compare ARM loans.

In other words, APR is just one metric to compare mortgages — it’s not the only metric.  The best way to compare your mortgage options is to review all the loan terms together and determine which is most suitable.  We do this with the Total Cost Analysis report.  The Total cost is simply the sum of the interest you will pay plus the closing costs you pay for a particular loan program.  We give all of our clients a Total Cost Report when they are looking at loan options. In fact, we can even plug in ompeting offers into our software and show the Total Cost of a competitors program.

If your Lender can’t help you calculate the Total Cost of a loan choice, ask some tough question – they are telling you that they can’t tell you the cost of the product they are selling.  Yikes! Do you really want to buy that?

On July 30th, 2009, new regulations from the Federal Reserve and the FDIC regarding the Truth in Lending Disclosure, or TIL, go into effect. The effect to home buyers or homeowners that are refinancing is that there will be a minimum of 7 business days required from the time the disclosures are delivered to the borrower at application to closing of the mortgage. In addition, if the APR (Annual Percentage Rate) changes by more than 0.25% on a fixed rate loan, the borrower needs three more days to view the new disclosures.  This will hamper the ability of lenders who can close loans quickly, or of buyers who can close quickly to move into their new house.

Most importantly, it raises the bar for loan officers – sloppy paperwork at application can result in an incorrect APR calculation.  If this happens, the closing will be delayed until three business days after the correct disclosures are delivered to the borrower.

This is from the Federal Reserve:

Regulation Z (Truth in Lending)
Early Disclosure Requirements FIL-26-2009
June 1, 2009

Summary: During 2008, the Federal Reserve promulgated revisions to Regulation Z (Truth in Lending) closed-end mortgage early disclosure requirements that were to take effect October 1, 2009. However, these changes were superseded by the enactment of the Mortgage Disclosure Improvement Act of 2008 (MDIA). As a result, the Federal Reserve has revised Regulation Z to incorporate the MDIA amendments. Compliance with the revised early disclosure requirements is mandatory on July 30, 2009.

Highlights:
The revisions to the Truth in Lending Act (TILA) early disclosure requirements, incorporating the MDIA amendments:

• expand the requirements to mortgage loans secured by any dwelling of a consumer. The requirements no longer are limited to a consumer’s “principal” dwelling. The early disclosure requirements also now cover refinancings and home equity loans.
• require delivery or mailing of the early disclosures within three business days of receiving a consumer’s mortgage loan application. A lender also must wait until at least seven business days after delivery of the disclosures before consummating the mortgage loan.
• require corrected disclosures to be delivered at least three business days before consummation if the annual percentage rate provided in the early disclosures changes beyond the tolerances provided in Section 226.22.
• prohibit a lender from charging a consumer any fee, except to obtain a credit report, until after the early disclosures have been provided.
• permit a consumer to expedite the closing of a mortgage loan subject to the early disclosure provisions to address a personal financial emergency, such as foreclosure.
• inform a consumer that he or she is not required to complete the transaction because the consumer has received the early disclosures or applied for a loan.
  (See the attached supplement for a comparison of the 2008 and 2009 revisions and FIL-134-2008 for an overview of the 2008 revisions.)