How to Compare Interest Rates

There is only one way to accurately compare mortgage rates

The Federal Truth in Lending Act was instituted with the purpose to "...promote the informed use of consumer credit by requiring disclosures about its terms and cost." The Act establishes Annual Percentage Rate (APR) as the means for consumers to evaluate the true costs of borrowing and to compare one loan to another.

Annual Percentage Rate (APR)

The APR calculation accounts for finance charges, so it is typically higher than the note rate.  For a residential mortgage, finance charges are those fees charged by the lender, such as points, origination fee, commitment fee, application fee (unless charged to all borrowers whether or not approved), broker fees, processing fee, tax service fee and interim interest.  There could be others, so the general rule is that any fee charged by the lender or mortgage broker (except the appraisal) is a finance charge and should be considered in the APR.

Use this APR Calculator to Compare One Lender's Rates to Another

Lenders often interpret the Truth in Lending Act differently and may omit some fees in their APR calculation that other lenders include.  So to ensure that you are comparing apples to apples, use this simple APR calculator to compare one lender's rate and fees to another.  Simply open the spreadsheet, follow the instructions and the APR will be calculated based on the rate and fees entered.

Important Information about the APR and Comparing Rates

• The APR should be advertised.  The Federal Truth in Lending Act states that lenders should advertise the APR no less conspicuously than any other rate.  So as you compare rates, ensure the APR is disclosed along with the note rate.
• Get a Good Faith Estimate in writing, and when comparing lenders and rates, compare rates from the same business day.  Remember, rates change daily, sometimes more often.
• The APR is not the Note Rate.  Your monthly payment will be based on the Note Rate.  The APR is calculated for disclosure purposes only as a means of comparing one loan to another.
• Do not use prepaids or non-lender fees in comparing.  Third party fees and pre-paid items are not controlled by the lender and therefore should not be used in making a comparison.