In a previous blog, I discussed what APR actually is and how it's computed. If you don't quite understand it, please read my "What is APR Anyway?"  What I'm about to write is actually a little self-serving. I want the consumer to know that when I quote a rate it's difficult for me to compete with a deceptive advertiser. As a mortgage broker, I and others like me can usually beat any offer you may hear or see advertised but only if were on the same playing field. California State Law requires, among other things, that advertised rate quotes be accompanied by its APR. The bigger the difference between the payment rate and the APR, the more expensive the loan will be. This is where the borrower needs to pay attention.

In my business, closing costs will typically be .16%-.19% of the loan amount. So let's use this as a reference. I'm going to cite two specific ads I heard and saw over this past weekend. As I listened, I knew that the 30 year fixed rate mortgage was 5.75% at the time of the ads.

The first was from a regional mortgage company. Their radio advertisement stated they had a 30 year fixed rate loan at 5.5%. At the end of the commercial we were given the APR of 5.97%. That's a difference of 0.47%! So where did the money go? You are actually paying points from the closing costs to get your rate to 5.5% (1.0 point equals 1.0% of the loan amount). But that's not all. If I offered the same 5.5% rate on the same day and charged 1.0 point for the rate reduction my APR would be only 5.756%, a 0.256% difference and still lower than their advertised APR. In fact, order to make my APR equal theirs at 5.97% I would have to charge you 3 extra points over my regular fee! So what happens to the extra money? It goes into their pockets!

The second ad was even better. This was from Ditec.com on television. The camera moves through glass walled cubicles in what seems like a glass walled building and states that there is nothing hidden in their loans and everything is very clear. Well their offer was a fixed rate loan at 5.125% with an APR of 5.420%, a 0.295% difference. That's not as bad as the previous ad but how could they offer a rate so low? Two things come to light here. They never mention the term of the loan (unless it's in that really small print at the bottom of the television screen that you never have time to read) and they don't mention the points they have to charge to get that rate. Unfortunately, most people think of 30 years when they hear a fixed rate loan advertised. This ad said only that it was a fixed rate loan. It was actually a 15 year loan and the borrower pays a point to get the rate so low. The APR here is twice what I might charge making it a very expensive loan. Ditech is very clear aren't they?

We have to keep in mind that money is a commodity and on the same day, every lender has access to the same money. It's like the price of milk or gasoline. Everyone has to buy from the same wholesale market.

Remember, no company operates as a charity and there's nothing for free. So next time you hear or see a mortgage ad, listen closely for the APR and compute the difference in your head. If it's over 0.2%, be afraid.......be very afraid.