Simple Real Estate Definitions :APR

APR is an acronym for Annual Percentage Rate.  It's a government-mandated calculation meant to simplify the comparison of mortgage options.

A loan's APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure.

Because APR is expressed as a percentage, many people confuse it for the loan's interest rate.  It's not.  APR represents the total cost of borrowing over the life of a loan.  "Interest rate" is the basis for monthly mortgage repayments.

The main advantage of APR is that it allows an "apples-to-apples" comparison between loan products. 

As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees.  In this sense, APR can help a borrower determine which loan is least costly long-term. In other words, the APR is an artificial index that can be compared to determine which loans have higher or lower APRs, thus indicating the higher or lower cost to the consumer.

However, APR is not without its shortcomings.

First, different banks includes different fees into their APR calculations.  By definition, this spoils APR as a choose-between-lenders, apples-to-apples comparison method, though the total cost to the consumer is still accurately determined.

More importantly, when calculating APR, "life of the loan" is assumed to be full-term.  When a 30-year mortgage pays off in 7 years or fewer -- as most of them do -- APR comparisons are rendered less accurate. It is possible that a loan with a lower APR might be more expensive if the loan is not carried to the full term and would have had a higher APR if the shorter term had been used in the original calculations.

In other words, APR is just one metric to compare mortgages -- it's not the only metric.  The best way to compare your mortgage options is to review all the loan terms together and determine which is most suitable.