The Truth-in-Lending Disclosure Statement is a frequently misunderstood document because of the annual percentage rate (APR) that is stated on it. Borrowers often confuse the annual percentage rate with the loan interest rate. The APR is not the interest rate you locked with a lender. It is a mathematical calculation of the cost of your loan over the full period of the loan when you include any closing costs on top of the interest rate. The APR would be the same as your loan interest rate if there were no closing costs associated with your loan. Whenever there are any closing costs, regardless of who pays for them, the APR will always be higher then the loan interest rate.
Why is the APR disclosed at all? Because it is a quick - but not necessarily appropriate - way to compare one loan against another. For example, if you contacted three different mortgage professionals and asked each of them to quote you a 30-year fixed, conventional conforming rate for your home, and you told them you wanted a rate of 5.875% … you would probably get three different costs/pricing based upon their Good Faith Estimates. For some mortgage borrowers, deciphering three different Good Faith Estimates may be difficult. However, by looking at each of the three lenders’ Truth-In Lendering Disclosure Statements, you will see three different APRs. Not always, but most of the time, the lender with the lowest APR is giving you the best cost/pricing for the rate offered.
So, when asking for Good Faith Estimates from lenders … also ask for a Truth-In Lending Disclosure Statement. It will help you shop for the best rate/pricing.
On a side note, while mortgage borrowers may focus on getting the lowest APR, or the best rate possible, they should also search for reputable, ethical and honest mortgage professionals who will take the time to explain mortgage industry terminology to them. There are many such mortgage professionals on Zillow Mortgage Marketplace, as well as the writers here on Mortgages Unzipped.
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Not All ARMs Are “Broken” | Mortgages Unzipped
[...] with 2% ($6,000) in closing costs. If we count those closing costs as “interest” (and this article about APR explains why we must), the total interest you’ll pay over the next three years is about $60,000 (I’m [...]