Q. We have been reading your column for a long time, and understand your concern about shopping around for the best deal in a mortgage. Recently, we made application for a mortgage loan. Although we thought we were getting a 9 1/4 percent loan, the Truth in Lending statement indicated that the annual percentage range was 9.875. How can we accurately compare prices when the tools for competitive shopping are unclear - and indeed confusing"
A. When Congress enacted the Truth in Lending legislation back in 1969, there was great expectation that, once and for all, the consumer would be able to comparison shop by virtue of the actual annual percentage rate - the true interest on a loan. All too often lenders would quote rates which were completely misleading.
For example, when an auto loan is quoted at 6 percent "discount," the true simple interest rate is really 11.85 per year. If that same auto dealer quoted a 6 percent "add-on" rate, the true annual percentage rate is 10.90.
Let me give you this example. I lend you $100 at a simple intest rate of 8 percent. At the end of the year, you give me back my $100, plus $8 for the interest.
But, suppose when I lend you the $100, I subtract the 8 percent interest (namely, the $8) and only give you $92. Your obligation is to return $100 at the end of the year. Here the true annual rate is not 8 percent, since you have not had the full use of my $100 for the entire year. In this example, the annual percentage rate (the true interest) was 15.68 percent.
Although Congress tried to get away from misleading interest rates, in the mortgage area, at least, we unfortunately have come full circle back to this confusion. When you gave the example of your 9 1/4 percent interest rate, you probably had to pay points, lender's appraisal fee, and other charges to your mortgage lender.
Insofar as your lender was not advancing you the full amount of the loan (since you will have to pay up front the points and other charges), you will not have the full use of the lender's money for the period of the mortgage loan. Thus, as in my example above, the real interest rate is higher than that quoted you.
Nonetheless, the annual percentage rate can become quite significant. This is the yield to the lender that includes the simple interest rate on your mortgage loan, plus all the other charges imposed by your lender.
If you shop around, and inquire of other mortgage lenders as to their annual percantage rate, you may find some measure of competition.
Congress has recognized the necessity to simplify and clarify the Truth in Lending legislation, and indeed serious efforts at simplification are currently pending in both houses of Congress. Until such time as truth in lending reform is enacted, however, you still shoud be able to use your truth in lending disclosure statement - provided you get it in time.
If your lender has given you a loan commitment and you have not yet received a copy of the truth in lending statement, insist on obtaining it prior to signing that loan commitment. Many lenders give this statement to the borrower at settlement. At that time, unfortunately, it is a meaningless piece of paper, insofar as comparative shopping is then impossible.
Benny L. Kass is a Washington attorney.Write him in care of the real estate section, the Washington Post, 1150 15th St., NW, Washington 20071.