What Is an APR? Annual Percentage Rate Explained

Michele Lerner
Updated
what-is-APR

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When comparing home loans, you’d better understand what an APR is, because it’s a key factor in calculating your mortgage payments. Banks and lenders tend to throw this acronym around, but what exactly is an APR?

APR, or annual percentage rate, is the rate you’re charged over the course of a year for borrowing money. The percentage represents the actual yearly cost of the funds over the term of a loan, which can include the mortgage broker fees and some other charges that you have to pay to get the loan, including some of your closing costs.

What’s the difference between APR and interest rate?

The APR includes the interest rate and other charges, which is why it’s usually higher than just your interest rate. The interest rate is the amount you will pay each year to borrow money, expressed as a percentage. If you choose to pay a discount point (that comes with an upfront fee) to bring down your interest rate, that will be reflected in the APR.

How to shop for a mortgage

  1. Compare both the APR and the interest rate for each loan. The reason you should look at both numbers is that if you just stick to the interest rate, you may not know about the fees associated with your loan; and if you focus only on the APR, you could miss out on a lower interest rate. While the interest rate matters and influences your monthly payment, the APR gives you a way to compare the interest rate along with the upfront costs of your loan.

  2. Make sure you are comparison shopping on the same day for your mortgage. Rates change day to day, and you will get a better feel for what’s out there if you check rates close to the same time.

  3. Look for different types of lenders. Try going to several different places for a mortgage, such as a credit union, a community bank, a big national bank, and a direct mortgage lender to see how their rates compare. Don’t forget, though, that you should choose a lender who will provide you with good service, too. You don’t want to choose one based on the rate and find out too late that your loan can’t be closed when you need it.

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