The answer to that question is the government. The A.P.R. idea was started for cars which are generally financed three to five years. If you could look at the Annual Percentage Rate, you quite possibly would pick the lowest interest offer instead of trying to figure it out for yourself. Hint: The government doesn't think you are very smart. As my mother would have said to that, "likewise, I'm sure." What works for automobiles, although we aren't that positive as all the American car manufacturers are bankrupt (except Ford), doesn't come close to working for the mortgage or home finance industry. We finance homes for 1 year up to 40 or 50 years and during that time, the rate can change 100 times. Put that in a formula and let the people use it!
The problem lies in many areas, but for a variable, especially a short term fixed ARM, it is truly misleading. Right now, when we have short term ARMs in the 4% and 5% range, one would think they could get a fairly good reading. Generally, short term and long term rates work on an almost flat interest rate curve, however, it is currently very steep. The one year LIBOR rate is 1.6%. Most variable rate mortgages, but not all, are tied to this index because it is international. After the fixed period, the mortgage loan becomes an adjustable which can adjust one or two times a year in most cases. There is a margin, short for profit margin, that the lender adds to the index rate for your interest rate. Most margins are in the 2% range, so if we use 2.5% and add it to the 1.6%, the new interest rate, if the loan was adjusting today, would be 4.1%. We cannot predict where this is going, we must use today's reset interest rate for the rest of the term of the loan. If you had a 5 year fixed loan and it amortized for 30 years, you would have 25 years of a variable loan left. If your initial rate was 5.1% fixed for 5 years and the adjustment rate is 4.1% as I stated above, the A.P.R. for the entire 30 year loan, setting closing costs aside for this example, is 4.26% (5 years @ 5.1% and 25 years at 4.1%). Confusion by the borrowers is expected and is definitely there to be seen by anyone with 20/400 vision or better!
Another problem that arises in using the A.P.R. for guidance when looking for a mortgage is that not everyone measures it the same way. I have seen brokers include property taxes when figuring the cost of the loan and I am sure that prepaid interest has shown up at times. The whole thing is an exercise in nonsense. If you are going to get a 5% rate, your payments will be figured at 5% even though the A.P.R. is 5.126%. What did you gain by knowing the A.P.R was 5.126%? Many people generally tell me their A.P.R. and can't remember their actual rate.
As we have seen in so many other examples, the government makes rules, sometimes laws, and never worries about the consequences. As an example I certainly can bring up the A.P.R. on a short term fixed variable loan as I did above. Do you think those who we know will be screaming when their adjustment turns out to be higher than the fixed rate, when the A.P.R. was lower, have anything to gripe about? I am not a big fan of gripers or griping itself, but this time they just may have a point.