Annual Percentage Rate

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.

Your mortgage payment is based on the note rate, not the APR. The APR shows the total cost of the entire loan with closing costs.

Be aware that not all lenders or finance companies calculate the APR of a loan exactly the same. Therefore by looking only at the APR of a mortgage you may not actually find the deal that is definitely the best for you.

The APR is calculated by comparing your actual payment to the amount you financed minus the closing costs that are prepaid finance charges (PFC). Since the PFCs are taken from your loan amount and the payment remains the same the reverse calculation produces a higher rate, the APR.

The APR typically includes one-time fees. However, regulators have not completely defined which one-time fees must be included in the calculation. This gives the lender some leeway to determine which fees are included in the APR.

It is important to note that the APR is not equal to the mortgage rate you are paying, and is simply a tool to calculate the total cost of the money you are borrowing.

Rather than compare solely APR's on a loan, obtain a Good Faith Estimate of closing costs. Make sure you understand which fees are "third party fees" such as title insurance, Attorney fees, Survey, and other fees.

» DISCLAIMER: The information contained in this article on 'Annual Percentage Rate' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.