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Rarely is there such a simple question in the mortgage industry with such a complicated answer. The true definition of this one even puzzles some seasoned veterans. For those of you not interested in long and complicated, here is a very serviceable and very brief definition: APR is the true cost of money over time.
In other words, your mortgage has a NOTE rate, or the interest rate on your loan, but it also has closing costs, prepaid interest, and other finance charges. The APR is the cost of your normal interest and those finance charges over time expressed as an interest rate relative to the rate you are paying on your mortgage.
· Now for the long and boring stuff:
APR stands for Annual Percent Rate and was made a requirement of mortgage disclosures by the Federal Truth in Lending Act. It is intended to level the playing field among mortgage quotes. For instance, one loan might advertise a 4.5% NOTE rate, while another advertises 6.5% rate. But both of those loan's APRs could be exactly the same, meaning that although the 4.5% loan appears to be the better deal, if you take closing costs and finance charges into consideration, the cost is actually the same as the 6.5% loan. In fact, if you were to sell or refinance the house sooner rather than later, you'd probably pay less interest overall on the 6.5% loan!
Perhaps the most idiotic thing about APR is that the finance charges that contribute to the APR calculation must be manually checked and included by the person originating the loan. Because of this, two identical mortgage quotes could have completely different APRs because one of the loan originators didn't do their job correctly. Even worse for consumers is that the lower APR quote in this example would be the one generated by the inferior originator. My blanket advice is to know the NOTE rate of the loan you are applying for, and know the exact closing costs. Do not trust anyone's calculation of APR.
