When you are shopping for a mortgage, there are two numbers you need to be concerned with: the interest rate and the annual percentage rate (APR).
The interest rate is the annual cost of borrowing and doesn’t include fees or other charges.
APR reflects the interest rate, but also the cost of financing the transaction over the term of the mortgage. If you have ever financed a car, you have seen the same terminology. The process works in very much the same way with a mortgage.
When you finance a home, you have expenses that you wouldn’t have if you were to pay in cash. This would include lender fees, such as origination charges and processing fees, and non-lender fees, for items such as an appraisal.
If you could pay cash, lenders and lender-required appraisals wouldn’t be necessary, and there wouldn’t be associated fees. If not, these fees and others become part of the financing of your mortgage.
Two lenders may be offering the same rate and same terms for the same mortgage, but the lender’s APRs could be quite different. The one with the higher APR will be charging higher lender fees and has a higher cost for financing your mortgage.
Mortgage companies are now required to display APRs prominently in their mortgage advertising, and often dollar amounts of items included in the APR will be listed in the advertisement.
While APR isn’t the only factor in comparing lenders, it is one way to help you distinguish between offers.