How can there be two APR's?
The other problem with APR is a technical one faced by lenders.
Absolutely accurate disclosure before closing is a broad assumption. How can a lender meaningfully disclose the cost of credit when the interest rate for many borrowers is subject to periodic adjustment?
If you don't lock your rate or if you choose an adjustable-rate loan, your APR is going to change. The result is that lenders often draft two disclosure statements - one at application and one at closing - stretching their credibility and producing consumer confusion rather than consumer protection.
`Worst case scenario'
Carr Krueger has supervised the audit of more than 75,000 residential and 3,000 commerical ARMs the past two years for the Seattle accounting office of Arthur Andersen. He said lenders use a "worst case scenario" when calculating the APR of an adjustable-rate loan.
"The accuracy of the APR, considering all the different points and fees, would be extremely difficult to guarantee," Krueger said.
Another complication is that lender and borrower usually don't really zero in on the total cost of the loan or ponder the meaning (if any) of the difference between the interest rate and the APR until the application process starts.
"It costs money to take an application," Devine said. "How many
borrowers are going to leave their appraisal and credit deposits on the table and go shop for a better APR? Not all lenders use the same credit report or appraisers, so if you leave to shop that money is gone."
Gone is what emphasizing the importance of the APR should be. You know it's a problem when it's defined first by a loan rep and still not fully understood when it's explained by the escrow officer at closing.
Tom Kelly is a private real-estate consultant. His column runs Sundays in the Home/Real Estate section. Send questions and comment to Tom Kelly, P.O. Box 70, Seattle, WA 98111.
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