As consumers shop for financing and lenders quote their best, the annual percentage rate, or APR must be included with the offering. Or when a lender advertises their rates for various loan programs they must clearly state the APR along with the note rate. Not only show the APR but make sure it’sannual percentage rate clearly visible and not hidden in the “fine print” or smaller font. But is the APR really a good tool?

 Properly used, the answer is “yes” as long as the consumer is comparing the exact same mortgage loan among different lenders. An APR isn’t any good to compare a 30 year loan with a 15 year version. Different loan terms will affect the APR even with the same note rate and collection of closing costs.

The APR original intent is to provide a method where consumers can see the impact one set of closing costs has compared with another. For example, a mortgage note rate of 4.25% with $5,000 worth of closing costs on a 30 year $250,000 mortgage gives a 4.42% APR. With $7,000 in costs the APR jumps to 4.49%. The higher the fees the greater the disparity between the note rate and the APR.

Lenders can increase the loan term to lower an APR but can leave out a few closing costs required in the calculation. Not all fees are counted in the APR number. Title insurance isn’t, recording fees are not. Neither is homeowner’s insurance or escrow accounts yet these are all costs needed when obtaining most mortgages today. Why aren’t all closing costs included in the APR? No one really knows but the method of calculation is used in the same manner by all mortgage companies. APR can be manipulated and while it’s a required number lenders provide, it’s not always used in the best manner.