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APR |
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A good tool to compare loans across different lenders is the
Annual Percentage Rate (APR}. The Federal Truth in Lending
law requires mortgage companies to disclose the APR when
they advertise a rate. It is designed to represent the true
cost of the loan to the borrower, expressed in the form of a
yearly rate. The purpose is to prevent lenders from hiding
fees and upfront costs behind low advertised interest rates.
However the APR is in fact a very confusing number. Even
lenders admit it is confusing since it includes some, but
not all, of the various fees and insurance premiums that
accompany a mortgage. The rules for calculation of this
number have not been clearly defined, so APRs vary from
lender to lender and from loan to loan, depending on which
types of fees and charges are included.
We do not recommend relying upon the APR as an indicator of
a loan product's value. The APR calculation is based upon
the assumption that you keep your loan for the entire period
of the loan, say 30 years, which in reality may not be the
true hold period for a borrower.
In addition, the APR model is flawed in that when a product
is variable and tied to an index, the index is assumed to
never change. This obviously is an invalid assumption that
can lead again to a number, which in fact can not be
compared, from one quoting source to another.
Finally, the APR won't tell you anything about balloon
payments and prepayment penalties and how long your rate is
locked for. So a loan with a lower APR is not necessarily a
better loan. You can use APRs as a guideline to shop for
loans but you should not depend solely on the APR in
choosing which loan is best for your needs, it is important
to look at other factors.
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