APR vs. interest rate

The annual percentage rate (APR) can be an excellent tool to help you compare home mortgage rates as you shop. Take some time to learn what it is so that you will be an informed shopper.

Lenders typically focus on their interest rate offerings when they advertise a mortgage product. Of course, we all know that a low interest rate is a desirable characteristic in a loan. Still, it only represents one aspect of the mortgage costs that you will be responsible for. APR, on the other hand, is supposed to be a more holistic representation of all those costs, and so can be a better indication of the actual home mortgage rate.

Put another way: when a lender advertises its interest rate, it is leaving a lot of things out of the picture. For instance, there are a great many fees associated with your loan application and closing. Since these costs, especially for first-times, are sometimes ‘hidden’ from borrowers, the lender doesn’t exactly want to advertise their existence. For that reason, they stress the lowness of the interest rate.

Fortunately for us, the law requires that the lender also advertise the APR (although it need not be as prominent as the interest rate). The APR is supposed to include all of those potentially hidden fees that the interest rate doesn’t represent.

The key word is supposed; the law has not yet created specific requirements for fee inclusion in the APR. That means that you have to be careful comparing APRs across lenders. Sometimes, you have to take a magnifying glass to the fine print to figure out the exactly what is included.