You apply for a mortgage for $250,000 over 30 years at a fixed interest rate – known as a fixed rate mortgage. The costs you want to know are:

- The fixed interest rate. Your monthly payment will be calculated from this rate and the principal repayment each month.
- The lender fees you must pay at closing. This must be paid in cash to the lender, so it is important that know exactly what this amount will be. Not only do you need to know the actual sum to be paid in cash so you have it available, but also what that is as a percentage of the loan amount. That enables you to judge whether or not it is worthwhile paying more of a down payment. On a $250,000 mortgage, every 0.1% lender fee is $250 dollars to be paid up front.
- The total interest costs over the term of the mortgage. This is important because it indicates how much you are paying that doesn’t involve repayment of your mortgage loan. You can then find the total cost of the mortgage to you by adding the upfront fees to that. In the final analysis, this is the best way of comparing the costs of various mortgage offers.

You compare fixed interest rates and upfront fees and then combine the two for a total mortgage cost. That’s fine for a fixed interest mortgage, but what about a variable rate or adjustable mortgage? This is more complex, although the same points being made here also apply to them.

These are the costs that are relevant and important to you. Does Truth in Lending provide these? Yes and no! You must understand the terms used and what charges are included under each term. Under Truth in Lending, you would be informed of:

- The APR (Annual Percentage Rate). This is based upon the interest you would pay over 30 years. If you expect your mortgage to last less than that, then this will be irrelevant.
- The total repayment, which is your monthly repayment times the number of months – in this case 360.
- The sum financed, which is the amount of your loan less the finance charges paid at closing.
- The total finance charge: This is the total of the finance charge you paid upfront (lender’s fee) and the total amount interest you pay over the 30 year period.

By comparing each of these figures, you can make a decision on which offer you prefer to accept. Some complain that Truth in Lending does not adequately cover situations where the mortgage is paid early – but how can it? How does a lender know that you will repay your mortgage loan in 10 years rather than 30 years unless you take it over 10 years?

The Truth in Lending Act obliges lenders to be truthful in the costs of your mortgage loan. They will make these calculations based upon the information you provide and on the agreed repayment period of your mortgage. In that respect, it is a huge improvement in consumer rights relative to the situation prior to it becoming law.

]]>This confusing term has been designed by the government to enable you to compare the cost of various financial products irrespective of other variables. The annual percentage rate is not actually the interest rate you will pay over a year. It is a completely artificial term that has been calculated using a complicated formula.

The calculation of the APR, and the need to disclose it, is regulated in the USA by the Truth In Lending Act (aka Regulation Z,) and must be disclosed along with an amortization schedule within three days of an application being made for a mortgage.

If the only difference between loans was the APR, then the cheapest loan would be one with the lowest annual percentage rate. The problem is that this is not the only difference between different loans. A mortgage might include set-up fees, discount points and home owner’s insurance to mention just three of many possible additional costs.

The result is that it is very difficult for ordinary people to compare different loans, credit cards or mortgages. Another potential problem is the question of one-off charges applied when a loan is offered. The APR calculation can assume that this payment is spread over a number of years rather than calculate an APR for year #1 then another APR for all succeeding years.

A major problem with the annual percentage rate is that it is time dependant, and individual rates are meaningless unless quoted for the same time period. The APR for a 15 year mortgage cannot be compared to that for a 30 year mortgage. The differences you see are not the true cost of differences between taking a mortgage for 15 and 30 years.

Another issue is that most online APR calculators assume that a loan will be retained until the full term has run. If you sell your home during the 30 year period, the APR quoted becomes meaningless. The actual interest will then be higher than that quoted. Is the APR in these circumstances pointless?

Not quite. You can still use it to compare the same mortgages offered by different lenders over the same time period, as long as you understand that it applies only if the same fees, interest rates and other charges are the same for each mortgage being compared. It will be of little use in comparing different mortgage products offered by the same or different lenders.

So many people misunderstand its use that it has become a confusing term useful in part only to those that do not sell their home until the mortgage has been fully paid up over the agreed time period. It has limited use in comparing mortgage products, but is the only genuine way to carry out such a comparison.

What is APR then? It is a synthetic figure derived by taking all costs involved in a particular mortgage product into consideration and calculating an average annual percentage rate over the entire period of the mortgage loan. It becomes invalid when charges vary and if the borrower sells the property before the mortgage has been paid up over the original period (e.g. 15 or 30 years.) However, it does enable some degree of comparison to be made between similar mortgage products.

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