AgentIndustry News

APR not best gauge of mortgage costs

Why basing decision on 30-year term is misleading

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Consumers shopping for a mortgage are frequently confronted with having to make a choice between complex alternatives. For example, they can select a fixed-rate mortgage (FRM) on which the rate is fixed at 5 percent for 30 years, or an adjustable-rate mortgage (ARM) on which the rate of 4.375 percent holds only for five years, after which it changes with the market.On both loans, furthermore, a lower rate is available if the borrower pays points, an upfront charge expressed as a percent of the loan amount. In addition, borrowers have to pay a variety of fixed-dollar fees to lenders, and other fees to third parties such as title agents and appraisers.To deal with this problem, the federal government in the Truth in Lending Act decreed that lenders had to disclose one number designed to be a comprehensive measure of all costs, which borrowers could rely on in comparing one loan with another. They called it the annual percentage rate, or APR. By law, whenever a lender discloses an interes...