Wednesday, October 24, 2007

APR Not Good Judge Of Mortgage Character

by Broderick Perkins
© 2007 DeadlineNews.Com

Deadline Newsroom – You need more than the annual percentage rate (APR) to really get to know your mortgage.

While the APR will help you compare the APR of one mortgage with another, it won't come clean on other home loan and financial characteristics you'd better know before you're married to the terms of a mortgage.

Your home loan comes with the note or actual interest rate, but that's only one of the costs associated with your mortgage.

Quicken Loans says the APR includes both your actual interest and any additional costs or prepaid finance charges you might finance, such as prepaid interest, private mortgage insurance, closing fees, points, etc.

The APR represents the total cost of credit on a yearly basis after all charges are considered. It's typically slightly higher than your actual rate because of the added on items.

The APR was mandated by federal law to help borrowers compare costs from one mortgage to another, but in today's messy mortgage market, like outdated disclosures, it falls far short of revealing a loan's true colors.

Barry Habib, CEO of the Mortgage Market Guide says consumers who fall in love with a mortgage based on its APR alone could be in for some heartache.

"The problem is that APR calculations (and by extension, you) make some very bad assumptions," Habib said.

• The APR assumes zero inflation, that the value of a dollar today will be the same value 10, 20, even 30 years down the primrose path. That's obviously not the case. Thirty years ago, the cost of a gallon of gasoline was about 65 cents, according to the U.S. Department of Energy.

• The APR assumes the mortgage will never be prepaid or paid off early, but the average lifespan of a mortgage is from five to seven years by most accounts. Homeowners dump mortgages because they move on, up, down or out.

• The APR doesn't consider the value of the money used for fees.
"If you spent thousands of dollars in points or fees to get a lower rate, the APR calculation doesn't give any value to the money if it wasn't spent on closing costs," he adds. You could be better off investing in oil futures.

• The APR does not take tax consequences into consideration. "This can be
significant, because higher fees on the mortgage may not be deductible, while the higher interest rate typically is deductible," Habib said. emphasizes.

A more holistic approach is a better joining of you and your mortgage.

The best way to get to know a mortgage may be with the help of someone who can really show you get to know a mortgage's true personality as it fits your financial needs and lifestyle.

"The bottom line is that borrowers should forget about APR and think twice about those low advertised rates when they're accompanied by higher fees," advises Habib.

"They need to look at the big picture, and they need to look at it realistically with an eye on the future. A little homework goes a long way when choosing a mortgage. It can mean the difference of thousands of dollars every time they buy or refinance," says Habib.

So how do you find someone who isn't trying to play mortgage matchmaker, but is honestly looking after your best interests?

Ask family, friends, co-workers and others you trust, who've recently had a positive relationship with a home loan, to refer you to a broker, loan officer, lender, even financial planner or adviser.

Seek help from social service agencies, community groups, housing agencies and others offering loan counseling services.

Educate yourself.

Mortgage Confusion is Chronic
Mortgage Pitches Not Credible
Disclosures Deepen Mortgage Morass
More Time To Ponder Three Mortgage Tips
Coping With The Changing Mortgage Market

© 2007 DeadlineNews.Com

Broderick Perkins, an award-winning consumer journalist of 30 years, is publisher and executive editor of San Jose, CA-based DeadlineNews.Com, a real estate news and consulting service, and the new Deadline Newsroom, DeadlineNews.Com's new backshop. In both cases, it's where all the news really hits home.

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