A borrower who is shopping for the best mortgage rate can easily be seduced by low rate offers that are accompanied by low Annual Percentage Rates (APR). Federal Law requires that APR be disclosed along side the actual interest rate.  This is in order to help borrowers make a more informed decision on their mortgage. The truth is that APR is a very poor way to comparison shop for a Long Island mortgage or any mortgage throughout the country and can cause borrowers to make costly wrong decisions.

APR was created in order to provide a way for borrowers to account for costs associated with the mortgage. This sounds good because it may not be very easy to choose between a loan with a lower rate and higher fees or a loan at a higher rate and low fees.

The problem is that the APR calculation makes some very bad assumptions. First, APR assumes zero inflation and that the value or buying power of a Dollar today will be exactly equal to the value of a Dollar 10, 20 even 30 years from now. Next, the APR calculation assumes that the mortgage will never be prepaid or paid off. That means no refinancing or selling the home...highly unlikely since the average life of a home mortgage loan is less than four years.  The APR calculation does not consider the value of the money used for fees. So if you spent thousands of dollars in points or fees to get a lower rate, the APR calculation does not give any value to the money if it were not spent on closing costs. Finally, APR does not take tax consequences into consideration. This can be significant since higher fees on the mortgage may not be deductible while the higher interest rate typically is deductible. Moreover, APR can be manipulated, making it totally worthless. How does this work?

Here is a real example on a $150,000 fixed rate 30-year mortgage with zero points: Lender "A" is offering a rate of 5.875% with $3600 in fees and lender "B" is offering a higher rate of 6.125% with $600 in fees.

A closer look shows that Lender "A" is charging $3,000 more in fees than Lender "B". How do you compare? If you look at APR, Lender "A" (5.875% with $3,000 higher fees) has an APR of 6.149%. Lender "B" (6.125% but a $3,000 savings in fees) has an APR of 6.211%. So according the APR, Lender A is a better deal even though the fees are $3,000 higher...this is exactly what these high fee lenders are hoping you look at.

Let's look at the real story. The payment difference between the two is $24 per month. So is it worth paying $3,000 in fees to Lender A in order to save $24 per month? Hardly. It will take 10.5 years for a borrower to just to get back their investment! A bad choice when you consider that a Long Island mortgage or most U.S. loans typically are retired within four years. To make the decision to go with Lender "A" even worse, if that's possible, borrowers rarely take the value of today's dollars into account. Rather than giving Lender "A" the windfall of your hard earned $3,000, you should give it to yourself. Reduce the loan balance on your mortgage by the fees you are saving. In the example above that would reduce the loan from $150,000 to $147,000. This makes the payment difference just $6 per month instead of $24 per month! The true time to break even is really 500 months (more than 40-years!). So it is impossible to benefit from the higher fee program from Lender "A" because the maximum period on the loan is 30 years or 360 months. One more thing...when you calculate your tax deduction on the payment difference, it makes even more sense to avoid paying higher non deductible fees.
The obvious correct choice is to go with Lender "B" even though the APR is lower with Lender "A".

Bottom line...you should forget APR and think twice about those advertised low rates when you are Long Island mortgage shopping or any mortgage in the country when they are accompanied by higher fees.