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December 6, 2004
The APR Never
Gets Locked
�Recently I locked my
$100,000 mortgage at an interest rate of 5.75% and 1 point, with an APR of
5.94%. Now the rate is the same, but I�m told that the APR is 5.99%. I don�t
understand this, how can the rate be locked but not the APR? When I asked the
lender about it, he spoke to me like I was an idiot, he said yes, of course the
APR can change�What good is the Truth in Lending statement if the APR can change
all the way to closing? I close in 2 weeks, so I feel like I�m stuck.�
You are caught up in one of the most
perplexing failures of our mortgage disclosure system, one the Federal Reserve
could fix easily but doesn�t.
The annual percentage rate or APR is
a single summary measure of the cost of the loan to the borrower. The easiest
way to think of it is as the interest rate adjusted upward for all upfront fees
paid to the lender. The APR of 5.94% quoted to you when you locked included fees
of about $2,000, whereas the second APR of 5.99% included fees of about $2500.
The lender jacked up the fees by about $500 after you locked.
Lender fees are of two types, those
expressed as a percent of the loan, called points, and those stated in dollars.
You paid 1 point, which on a $100,000 loan is $1,000. Points are locked with the
rate, so that $1,000 did not change between the first APR and the second.
Fixed dollar fees, which were $1,000
at the time of the first quote, are not locked unless the lender elects to lock
them, as some do (see below). Your lender does not lock fixed dollar fees, and
raised them by $500 between the lock date and the date of your recent statement.
This is inexcusable, a stain on the
Federal Reserve which administers Truth in Lending. It could fix the problem
simply by ruling that a lender locking the price also locks the APR. It is also
a stain on the mortgage banking trade groups, which don�t press the Federal
Reserve to do this.
How to Avoid the Problem
Borrowers avoid the problem if they
deal with a mortgage broker, because brokers won�t deal with lenders who play
games with their fees. Brokers won�t tolerate a scam that puts money only in the
lender�s pocket.
Borrowers can also avoid the problem
by only dealing with lenders who guarantee their fees and show them on their web
sites. Here are some of them: Eloan, Countrywide Financial, ETrade Financial,
ABN/Amro, and IndyMac Bank. Others will if borrowers insist.
With only two weeks before you close
on a house purchase, it is too late to change lenders. However, you have one
strong card to play: the real estate sales agent, who referred you to this
lender.
Lenders often live and die through
their referrals, or lack of referrals, from sales agents. The last thing a
lender wants is a client who causes problems for the agents who refer customers
to them. That could mean the end of the referrals.
If I
were in your shoes, I would
inform
the lender that I expected a settlement
statement at closing with the fees shown on the
statement you received when you locked. If you
don�t get it, you are going to demand that the sales agent who recommended the
lender, pay the shortfall. Given the choice between losing $500 and losing a
source of referrals, the lender will almost
certainly give up the money. Odds are that the lender will also
stop treating you like an idiot.
Copyright Jack Guttentag 2004
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