If you are a first time home buyer or have purchased many homes, the type of mortgage you select is very important in Washington DC.

A mortgage is a document signed by a borrower when a home loan is made that gives the lender the right to take possession of the property if the borrower fails to pay off the loan. Listed below are the many things the home buying consumer should know before applying for a mortgage loan. There are many types of home mortgage loans within Washington DC to select from with lots of different offers and home mortgage loan application decisions.

What you should know before applying for a Mortgage Loan

A good tool to compare loans across different lenders is the Annual Percentage Rate (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and up front costs behind low advertised interest rates.

However the APR is in fact a very confusing number. Even lenders admit it is confusing since it includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. The rules for calculation of this number have not been clearly defined, so APRs vary from lender to lender and from loan to loan, depending on which types of fees and charges are included.

We do not recommend relying upon the APR as an indicator of a loan product's value. The APR calculation is based upon the assumption that you keep your loan for the entire period of the loan, say 30 years, which in reality may not be the true hold period for a borrower.

In addition, the APR model is flawed in that when a product is variable and tied to an index, the index is assumed to never change. This obviously is an invalid assumption that can lead again to a number, which in fact can not be compared, from one quoting source to another.

Finally, the APR won't tell you anything about balloon payments and prepayment penalties and how long your rate is locked for. So a loan with a lower APR is not necessarily a better loan. You can use APRs as a guideline to shop for loans but you should not depend solely on the APR in choosing which loan is best for your needs, it is important to look at other factors.

Why Ask?

The first question to ask when applying for a mortgage is "What is the annual percentage rate?" and not "What is the interest rate."

Cost Disclosure

Let's discuss what APR was meant to disclose and how it should be used. Let's start with a hypothetical mortgage of a 7.00% - 30 year mortgage of $100,000 that has an origination fee (commission) of 1½ points (1½% of the loan amount or in this example $1,500) and other fees of $2,500. Sound pretty good? The APR is 7.409%. What happened to the 7.00%?

Mortgage Math

You are paying $4,000 to borrow $100,000. In effect you are only getting $96,000, but will pay back the full $100,000 with interest.

Another way to look at understanding the annual percentage rate is: The $4,000 of fees in the above example divided by 30 years is $133.33 per year of additional interest. What happens if we pay this loan off in 5 years? The APR jumps to 7.998%. The fees we pay are spread over fewer years, increasing the costs per year. The $4,000 in fees divided by 5 years sky rockets to $800 per year of additional interest.

See if you can guess which is the lowest cost loan:

Example # 1 - 30 year fixed rate loan at 6.875% with 2½ points origination fee and additional fees of $2,443

Example # 2 - 30 year fixed rate loan at 7.000% with 2 points and additional fees of $1,943

Example # 3 - 30 year fixed rate loan at 7.125% with 1½ points and additional fees of $2,143

The correct answer is Example # 1 with an APR of 7.381%. Example # 2 and Example # 2 had APRs of 7.403 and 7.500 respectively.

Let us apply reality to the above examples. Fewer than 5% of all 30 year mortgages are kept 30 years. What if this loan is paid off in 5 years?

Give up? Example # 2 with an APR of 7.984% #1 had an APR of 8.113% and #3 8.035.

When you shop for your next mortgage, what is the first question you should ask? And if THEY can't answer, before hanging up, tell THEM that "the APR is the measure of all of the costs of a mortgage expressed as an annual percentage rate."