Here’s why the APR is a moving target. The APR calculation was put in place by the Federal Government more than 30 years ago as means to help consumers compare loans, and to learn what the true cost of a loan is. In theory, that sounds great, but the reality is that it’s another example of where the government had good intentions on something that in practice does little good. The problem is this: the government has not clearly defined exactly what should and should not be included in the APR calculation—in fact, the Feds even offer a free APR calculator that one can download, but right on the calculator it says something like: “We don’t guarantee the methodology behind the calculation!”
Why does APR change?
That brings us to your question: Why has the APR changed from the time you locked? There are several reasons for that. First, you chose a loan with a lender credit, which means that not only are we not charging you any APR fees—we are in essence paying you to get the loan. There’s a debate in the industry, and the Feds have not given an interpretation to settle that debate. About where a lender credit should be included in the APR calculation. Our strong opinion is that it absolutely should; the whole point of the APR is to help you pick between loans or rates. Either between two different rates on a lender’s website or our loan against a competitor.
The APR is supposed to disclose the “true cost” of getting a loan when you factor in what you pay in costs to get the loan. Then a lender credit, which lowers the total cost of getting the loan, should absolutely be included. That’s how we have implemented the calculation on our public website at Box Home Loans. This gives you the “real” APR to help you choose between rates or programs.
However, some of the major lenders who purchase our loans are used to charging their retail customers all kinds of fees. Quite frankly, they haven’t thought through this lender credit concept very well because it never comes up for them. Consequently, some of them don’t want to put the lender credit into the calculation. We suspect over time—as they step into the modern age—will agree with us and start including those in the calculation. Because we don’t know which investor we’re going to sell a particular loan to, we just play it safe. By choosing to calculate the APR without the lender credit included when we process and close the loan. That way the APRs on the Truth-in-Lending document would be suitable to some of those who don’t think like we do. In essence, our processing software is over-estimating the APR on these types of loans because of that.
Why not make it consistent on our website?
You might ask, then, why don’t you make it consistent on your website? Good question. Because we also have the firm belief that our website—which is one of the most useful and transparent in the business—should help our customers make decisions about which loan or rate they should select. We feel that over-estimating the APR there would be a disservice.
Finally, you should also note that the APR that you see on your disclosure paperwork initially, will also change slightly. Between what you see at the outset and what you see at closing. Here, we produce another Truth in Lending document. That happens because some of the APR fees are moving targets. Such as the “prepaid interest” which is determined by the day we close your loan. Which date isn’t finalized until we have final approval on your loan. If we close a day later or earlier than expected that would affect the APR figure.
In the final analysis, you will want to keep an eye on the closing costs you are paying. In particular, the lender fees. Our fees won’t change (unless key variables in your loan change, like your loan amount or appraised value). You can make sure you are NOT getting taken advantage of. You can compare the lender fees we quoted at time of lock to what we disclosed now to what we disclose at closing.
That’s probably more than you wanted to know, but it is the simplest way to explain the differences in APR figures.