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Annual Percentage Rate Definition

September 12th, 2008

Annual Percentage Rate (APR) is an interest rate that factors in costs and fees for your mortgage loan in addition to the mortgage rate. APR is expressed as a yearly rate of interest and was intended to give you an idea of the total cost of borrowing. Annual Percentage Rate is not the mortgage rate your payments are based on.

The Annual Percentage Rate was supposed to make choosing a mortgage loan easier because you could use the figure to determine which loan had the lowest overall costs. If the loan’s mortgage rate and APR were low you could assume the lender fees were low as well.

The problem is while Truth in Lending laws require that mortgage lenders disclose the APR for their home loans, there are no standard rules for calculating the Annual Percentage Rate. This means mortgage lenders can more or less pick and choose which fees they include in the calculation. This makes the Annual Percentage Rate more of a marketing tool for lenders and all but useless for determining which loan offer is a better deal.

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