Annual Percentage Rate (APR)

Your Annual Percentage Rate, or APR is a percentage of your loan amount designed to give a more accurate picture of the relative cost of financing than interest rate alone. The APR disclosed by your mortgage company is NOT the same as your interest rate. Your APR will almost always be higher than your actual interest rate.

APRs came about as an effort by Truth In Lending regulations to help consumers more easily compare the overall cost of financing between lenders. Unfortunately, it's far from a perfect system. The problem is that different lenders have different charges and fees. Some are upfront, others may be at the end of the loan. Since no two lenders are alike, the APR is supposed to allow you to compare apples-to-apples by rolling all of these charges into one lump sum and stretching it across the life of the loan. APR takes into account inflation by weighting today's dollars more than those you will pay 30 years from now, but it doesn't take into account your intent.

For example: Most mortgages are paid off early. APR calculations assume the opposite, and spread the finance charges out over the entire term of the loan, which makes it somewhat deceptive.

In addition, not all lenders charge fees in the same way. Some will absorb certain costs but charge a slightly higher interest rate, others simply charge the fees up front. While not nessecarily useless, this kind of inconsitency makes Annual Percentage Rates extremely unreliable in my book.

When I was shopping for my last mortgage, I compared lenders by simply adding up all the fees they charged and comparing both fees and interest. Because the market was so hot, it was easy to spot the winner: they had lower fees and a lower rate than anyone else. As always, I must caution you to consult a financial professional when making your determinations. What worked for me may not work for you, but common sense should always prevail.