Lowest rate isn’t clear using APR

Q:We are under contract to purchase our first home and are in the process of

mortgage shopping. I was told that the best way to really compare mortgages is by checking the annual percentage rate. The problem is that most loan officers are unable to tell me the APR over the phone. It seems as if they’re trying to skirt the issue when I ask. They all want me to believe that the APR isn’t important. If that’s the case, then how come I’ve read that the federal Truth-in-Lending Disclosure, which displays the APR, is supposed to be so important? Please advise.

A: I’ve been at battle with the APR for years, as have most other competent loan officers. You have probably been browsing government-sponsored Web sites that espouse the myth that comparing the APR among lenders is the best way to find the lowest mortgage rate.

Nothing could be further from the truth. Let me explain.

The APR is supposed to give the consumer the ability to compare mortgage rates on an apples-to-apples basis. It is supposed to give the consumer the true cost of the mortgage expressed as an interest rate when you take into consideration any costs associated with the loan.

The APR is well-intentioned, but it just doesn’t work. I am not short on reasons as to why. Here’s a sampling:

• All transactional costs are not included when calculating the APR. Lender fees such as underwriting, document preparation, origination fees and discount points are typically included in the calculation. But appraisal fees and attorney fees, among other costs, often are excluded.

• Lenders don’t calculate the APR uniformly. The sad truth is that the APR is calculated through mortgage software. Lenders use different software, which may have slightly different programs that calculate the APR.

• The APR is calculated as a result of numbers that are fed into the program. These numbers come from the Good Faith Estimate, provided by the loan officer. If the loan officer underestimates the costs associated with obtaining the loan, his APR will be falsely low.

• One cost that is included when calculating the APR that, in my opinion, should be excluded, is prepaid interest. Prepaid interest is simply the interim interest paid at settlement for the remaining days of the month from the settlement date.

If you settle at the end of the month, the prepaid interest will only be for a day or two. But if you settle at the beginning of the month, the amount of prepaid interest will be about 30 days, which will increase the APR.

But settling at the beginning of the month means the borrower receives his loan proceeds 30 days earlier and his first payment is due 30 days later.

I’ve had arguments on this issue with other mortgage professionals. I’m staying firm: Prepaid interest shouldn’t be included when calculating the APR.

Either way, the settlement date is often not firmed up at the time of application, when the APR is disclosed, so the loan officer must guess the prepaid interest anyway.

• Federal law requires that the APR be calculated for adjustable rate mortgages, which is preposterous. How can any loan officer worth his salt sincerely tell his client an accurate APR when the note rate will change in the future to an unknown rate?

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