Why APR Alone Is a Poor Way to Compare Mortgages
Why APR Alone Is a Poor Way to Compare Mortgages
"Just choose the lowest APR."
If only mortgage shopping were that simple.
APR includes the interest rate and certain financing charges. But it does not know your plans to sell, refinance, or make extra principal payments.
You may be planning a three-year relationship with the mortgage. APR is doing the math for a 30-year marriage.
Lender credits can also muddy the comparison.
One lender charges you $600 for an appraisal. Another covers it. With everything else identical, you save $600—but both loans may show the same APR because qualifying appraisal fees are generally excluded.
Your bank account notices the $600. APR may not.
Here is how to compare mortgages properly:
1. Construct an apples-to-apples loan scenario.
Use the same loan amount, down payment, loan type, interest rate, term, rate-lock period, and closing date. Request pricing at approximately the same time.
2. Compare one-time costs after lender credits.
Add up points, lender fees, and other one-time closing charges, then subtract lender credits.
Exclude prepaid property taxes, prepaid interest, prepaid insurance, and initial escrow deposits from this fee comparison.
3. Use your timeline.
Compare borrowing costs and remaining balances over the years you expect to keep the loan. If you pay more upfront for a lower rate, will you keep it long enough to recover that expense?
4. Check what can change.
Understand ARM adjustments, interest-only periods, and prepayment penalties. Your mortgage should remain manageable when life ignores your calendar.
Use APR as a reference. Choose your mortgage based on the costs and terms that matter to your plans.
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