Annual percentage rate

As you shop for the best possible home mortgage, you will likely pay close attention to differences among interest rates. While interest rates are important, they are not the only tools you should use when conducting comparisons across lenders. The annual percentage rate, or APR, is another way to determine which loan will best serve your needs.

In fact, comparison-shopping was the reason behind the invention of mortgage APRs, which are designed to express the full cost of the mortgage as an annual rate.

To explain: interest rates, while revealing, give borrowers no insight whatsoever into the other fees that contribute to the cost of a loan. The cost of insurance is not represented by the interest rate; nor is title loan costs, appraisal fees, and other charges. Theoretically, lenders could advertise rock-bottom interest rates and charge a fortune in hidden fees.

Fortunately, the American government is watching out for borrowers. To prevent misleading advertisements, the law requires that lenders publicize their annual percentage rate. The APR, unlike the interest rate, includes fees like those discussed above. As a result, the APR is a more precise reflection of the actual costs associated with a mortgage.

Still, the APR is not a perfect tool. Lenders calculate their APRs in different ways because there are no regulations governing the required math. Some companies might include all of their fees, but others lenders might not. As a result, it is best to use APR comparisons as a rough guideline, instead of a decisive one. When in doubt, ask your lender for a list of what is included in their APR calculation.