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What is an Annual Percentage Rate (APR)?
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.

Example:
30-year fixed      8 percent      1 point      8.107% APR

The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.

The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.

Ideally, one should be able to compare APRs from various lenders, then select the loan with the lowest APR.

Unfortunately it's not that simple. Various lenders calculate APRs differently! A loan with a lower APR may not be the best choice. A good way to compare different lenders is to ask them to provide a Good Faith Estimate of closing costs. Be sure you compare the same loan program (e.g., 30-year fixed), interest rate and rate lock period. You may ignore fees that are independent of the loan, such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Pay particular attention to loan fees. The lender with the lowest loan fees will likely have the best deal.

The reason why APRs are confusing is because the rules to compute APR are not clearly defined.

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