APR

A misguided, but common, approach to mortgage shopping is to compare interest rates. Under this system, the offer with the lowest interest equals the best mortgage rate. The savvy shopper will focus on the annual percentage rate (APR) for comparison purposes. More often than not, this figure will point you in the right direction.

The principle underlying APR is that shoppers need a basis for comparison that includes all of the costs of a mortgage, which includes the interest rate as well as upfront fees like points and closing costs. The APR, then, was designed to be all-inclusive.

Interest rates, on the other hand, are far from all-inclusive. A low interest rate might be undermined by hidden fees that will significantly raise the total cost of the loan. That’s why a shopper who gives all their attention to interest rate comparison might be missing out on the bigger picture, thus missing out on the best mortgage rate.

Thankfully, there are laws regulating the industry. These laws state that mortgage lenders must advertise their APR. As a result, it has become more difficult to obscure fees from the borrower. In other words, the regulations keep lenders (and their advertisements) honest.

Still, it is important to keep in mind that there is no rigid formula that dictates the way that APR is calculated. As a result, Lender A might calculate their APR in a slightly different way than Lender B does. Furthermore, an APR does not necessarily factor in every single cost associated with the mortgage. When in doubt, it is best to ask.