Watch That Rate Quote
by David Reed
Interest rate surveys don't always tell the truth. Which surveys? The ones in your Sunday newspaper and their online counterparts listing various local mortgage lenders and their current rate quotes. Which ones don't tell the truth? You can spot them by the variance in APR. Federal Truth in Lending laws, specifically a sub-section called "Regulation Z," set out guidelines that mortgage lenders must follow when advertising mortgage rates. The statute requires, among other things, that if a lender advertises a particular interest rate, the lender must also quote the Annual Percentage Rate, or APR. The APR is correctly defined as the "cost of money borrowed, expressed as an annual rate." The APR takes into account the note rate, which is the rate your monthly payment is based on and any and all lender fees and finance charges. Here's where it gets tricky. There are four functions when calculating a monthly payment: Term (or number of months financed), Interest Rate, Loan Amount and Payment. To find a monthly payment for a home loan, you need to know the term, rate and loan amount. For a 30-year loan at 5.75 percent borrowing $100,000 the payment turns out to be $583. The neat thing about this formula is that by knowing any three of the four functions, you can find the fourth. For instance, let's say you wanted your payment to be $800 per month on a 30-year note and interest rates are at 5.75 percent, that will tell you what your loan amount would be. In this case, 5.75 percent over 30 years and an $800 payment works out to a loan amount of $137,000. It works with any calculation; as long as you know three of the variables, you can find the fourth. Still awake? Good. Here's the sneaky part. The APR number is supposed to reflect any additional loan fees the lender is charging such as discount points, origination charges, application fees, credit reports, and so on. These charges on many conventional loans will usually add up to about $1800 on a $100,000 conventional loan that includes an origination fee of 1 percent. Standard lender charges will increase the note rate on 5.75 percent to an APR of 5.91 percent. This is a broad example, I know, but also usual and customary. There's a difference of about 16 basis points between the note rate and APR in this example. Now go online and look up some rate quotes on an interest rate survey. What you're looking for is a combination of a low note rate and a comparatively low APR, say 1 or 2 basis points. I visited a well-known interest rate survey site and perused the advertisements for a conforming 30-year fixed rate quote. I saw perhaps 20 or more lenders advertising their rates, but I concentrated on those with a small disparity between note rate and APR. One lender offered an ultra-low rate of 5.125 percent with an associated APR of 5.14 percent. At first glance, this offering looks like not only is the lender or mortgage broker very low on their note rates, their lender fees are also very low, resulting in a lower APR number. Okay, fair enough, but remember that by knowing three of the four variables we can always find the fourth. In this case, let's take the Note Rate of 5.125 percent, the loan amount of $100,000 and the term of 30 years and calculate for payment, which equals $583. Now, let's change the rate variable to 5.14 percent and calculate for loan amount, leaving everything else the same. The result? A loan amount of $99,830. The Sherlock Holmes part is that the difference between $99,830 and $100,000 are the lender's closing costs. This lender is quoting a 30-year fixed rate at 5.125 percent and only has $170 in closing fees. Oh really? Okay, you doubters. Try it yourself. Go online or find a survey in the newspaper and do the same drill: Find the lowest note rate with a small variance between the note and APR. Now call the lender, tell them you found them online and want to verify their rates and fees. If they even so much as mention an appraisal charge of $300, they're already liars. |
