Annual Percentage Rate
is also called the "Annualized Percentage Rate"
or "Truth-in-Lending" or "Regulation Z".
was started in the late seventies to keep lenders from
hiding extra points and fees in the interest rates quoted.
It's purpose is to give borrowers a way of comparing the
costs of the same loan, at the same rate, between lenders.
It is required by law that any rate quoted be accompanied
by the APR for that rate. It's purpose is great. There
are a few flaws in the system that you should be aware
Points are the biggest.
are amortized over the life of a 30 year loan, not the
actual life of the loan. The usual break-even period is
between 6 - 8 years. So the APR doesn't reflect the really
impact of paying thousands of dollars extra at closing
when you have a high likelihood of selling or refinancing
in 4 - 5 years ( national average ).
other game that is played is that your initial APR ( to
get you in the door ) is often a lot lower than the one
you get at the closing table, when it's too late to change.
This is something that can happen legitimately because
of changes in rates or points or fees or programs. If
your lender is making those changes, you have a right
to be informed about them and why before you
get to the closing table. Remember, until you "lock-in",
your rate can change and sometimes in the processing of
a loan the program needs to be changed to make it work.
Far too often the "great deal" you started with
isn't the one you get and it's too late to do anything
but complain, if you can find anyone to complain to.
If you are using the APR to compare lenders, make sure
you are comparing "apples to apples" and know
who you are doing business with. The story you get may
not always be the real one. It's not the promise
that counts; it's the reality of the delivery.