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The APR Can Be Useful Only When Comparing Identical Loan Programs.

This is the main reason that many loan officers dismiss the value of the APR number: They mistakenly assume that you can use the APR to compare absolutely all mortgage loan programs at once and pick out the best one simply by looking for the lowest APR.

That's a mistake. If you get this explanation of how the APR is used from your loan officer, that loan officer had better be very, very good in other areas, because he's flat-out wrong in this one. Here is the kind of thing you're likely to hear: "The APR is useless because for loans with less than 20 percent down, it assumes that mortgage insurance will be on the loan for the entire loan term."

That's true. That is the assumption used in the calculation. But that doesn't necessarily mean that the APR is wrong; it only means that it uses a mortgage insurance premium in the calculation. Remember, anything that is required from the lender to get a mortgage must be included in the APR number.

The trick is to use the APR when looking at identical loans. If one loan needs mortgage insurance, then the next one from another lender will too, so the APRs should be a useful tool.

"The APR doesn't work when comparing adjustable-rate mortgages to fixed rates."

Again, that's true. We'll explore the wide, wide world of available mortgage loans in Chapter 7, but that's not how you compare them. Adjustable-rate mortgages use what is termed the fully indexed rate when calculating the APR number. It's a different number. An adjustable-rate mortgage may start out at 4.00 percent, but that may not be the number that's used to calculate the APR.

Why is that off the mark? The APR works only when comparing like loans. And a fixed-rate loan and an ARM are not alike. The APR doesn't work right when you try to compare loans this way.

In the real world, you'll speak to loan officers with various levels of experience. Meaning, of course, that you could get some very wild data. What do you do?

If you're getting APR quotes that vary significantly from one another, or if you're simply tired of all the disclosure stuff, try another method: Get closing cost quotes from your prospective lenders, and pay no attention to any closing fee that's not from your lenders.

In addition to the difference between recurring and nonrecurring fees, there is also a difference between nonrecurring fees that involve lender charges and those that involve nonlender charges. Lenders can control what they charge, but they cannot control what an independent third party charges.

 
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