Mortgage Law: APR’s and Advertising
Perhaps no industry can be more confusing when viewing advertisements than mortgages. In addition to the disclaimers, loan products (when appropriately customized to each individual’s financial needs) have dozens of different variables. How does the average consumer compare a 30-year vs. a 20-year mortgage at different rates? What are discount points? What about origination fees? Each of these variables can have significant differences in the hidden costs of a loan, and without a degree in advanced algebra, making comparisons can be difficult!
To empower consumers, all advertisements are governed by the Truth-in-Lending Act of 1968. This law created a standardization of advertisements and the requirements to display what we know as the APR or Annual Percentage Rate. The APR is the standardized measure which takes into account all of the costs of getting a loan in addition to the interest rate (or note rate). In simple terms, the APR is the true cost of a loan with all of its factors that is displayed in a simple percentage. Therefore, a consumer can simply compare APR’s to know which loan is more or less expensive.
Important to note, the APR cannot show which loan is best for your financial situation – especially when taking cash out or consolidating debt. It also cannot measure the service quality or reliability of a company. When comparing similar loan products, however, the APR empowers consumers to find the most cost-effective loan options.