Errata....

I On Jul 25, 2:15 pm, I wrote:
With the corrections above, I compute an annualized IRR of 7.0079%
(rounded), including the prepaid interest. To get 7.168% and 7.144%,
I would have to assume that the lender included an addition $4010 to
$4040 in initial costs, which you (or the lender) did not mention.

I think it is more likely that that is simply the NPV of costs added
to each payment, for example to cover PMI. If you provide the URL for
the mortgage calculators that you used, perhaps I can explain the
descrepancy better.

What am I missing?

Only that the APR is really not a good way to compare loans, at least
in the US.

Interestingly, the Consumer Handbook on ARMs
(at http://www.federalreserve.gov/Pubs/a...msbrochure.pdf)
says exactly the opposite. It states: "Because all lenders follow
the same rules when calculating the APR, it provides you with a good
basis for comparing the cost of loans".

Well, yes, "all lenders follow the same rules". But the rules have
such great flexibility that two lenders with identical loan terms and
costs can disclose different APRs in advertisements and pre-loan
documents as long as they state that the APR might increase after
consummation.