What is APR? Mortgage terms to know

When searching for a mortgage, many homeowners might wonder: “What is APR?” Mortgage loans have interest rates, but also other costs - this is where the annual percentage rate (APR) comes into play.

But what exactly does APR mean, and why does it matter for mortgages? Here is a basic guide to help you understand this crucial aspect of a loan estimate:

What is APR?

APR, or annual percentage rate, represents the amount of interest you’ll pay on a loan yearly. It’s a term you’re likely to encounter in the financial world, as credit card companies and lenders are required to include APR in their advertisements.

APR in mortgage loans

With mortgages, the advertised APR may be different from the mortgage interest rate. This is because the APR includes other factors like lender fees, closing costs, mortgage points and private mortgage insurance along with the regular interest rate.

APR vs interest rate

One simple way to compare APR and mortgage interest rates is to consider APR to be the “overall cost” of borrowing money for your home. While your mortgage rate directly affects your monthly mortgage payments, the APR reflects the total annual cost of the mortgage.

For this reason, many experts recommend comparing APR when shopping for a loan. The Truth in Lending Act (TILA) requires both lenders and credit card companies to disclose the APR up front, which makes it simpler to compare. However, it’s important to check with each individual lender to find out which fees are included in their advertised APR.

Mortgage APR is important to understand along with the myriad other financial terms in the real estate world. The more you know about what goes into your potential loan payments, the better decision you can make on a mortgage.