Why an APR May Not Provide the Definitive Comparison

The Annual Percentage Rate (APR) is one of the tools available that mortgage shoppers can use to measure variances between plan rates and terms of agreement. Under the law known as the Federal Truth in Lending Act, mortgage companies are mandated to divulge the APR anytime they promote a particular plan.

In essence, the APR is designed to present the actual, annual cost the borrower will need to pay for the funds requested. The intent of this regulated disclosure is to dissuade lenders from slipping in additional costs within thinly veiled below-market rates.

Though intended to be straight-forward, the APR is actually quite a complicated measuring device. The reasons for this lack of clarity include: lack of enclosure of all necessary figures, different methods by which figures were calculated and commonly held notion that APR rates vary for identical plans from one lender to another and one plan to the next.

Hence, what experts suggest is that consumers do not rely solely upon the APR to determine the value of a loan. This advice is based in part on the fact that APR figures are contingent upon the notion that you will hold onto the loan for the full term of the loan. Thus, if it is a 30-year-loan, than you must retain it for the entire duration in order for the APR calculations to apply.

Another presiding reason as to why APR models are considered ineffective is in situations when the loan is not associated with a fixed but fluctuating interest rate. For under APR calculations, the index is viewed upon as being static. Though deciphering how fluctuating interest moves will move is not a predictable science, it is one that needs to be taken into account when comparing varying plans.

And on a final note, the APR does not relay any information with respect to balloon payment and | or penalties for early payments. With this said, one can conclude then a mortgage loan with a lower APR is not automatically viewed upon as being a better buy. It is safest then to employ APRs a general measure when comparing a range of loan features. Yet, it is not advised that one solely rely upon APRs as the singular basis upon which he | she chooses a mortgage loan according to their own financial situation.