When a mortgage is advertised and/or when you apply for a loan and receive a loan disclosure you'll see an interest rate for your loan as well as an Annual Percentage Rate (A.P.R.). As you compare these two figures you will see that the rates will be different. This is very confusing to most borrowers. The reason there are two interest rates listed is that federal law requires the lender to tell you both.

The interest rate for your specific loan is pretty straight forward. It is the interest rate for the money borrowed to purchase the property.  The A.P.R. on the other hand is a tool for comparing different loans, and it includes everything related to the property loan which can include the costs of the points, closing costs financed, and other costs and terms related to the overall cost of the loan. The A.P.R. is designed to represent the "true cost of getting a loan" to the borrower. It is expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.

While the A.P.R. is designed to make it easier to compare loans, it's sometimes confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that also accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can still vary from lender to lender and loan to loan.

Additionally, the A.P.R. on a loan which is tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were created because the market index does change -- that's why they're "variable rate" in the first placed!  So, A.P.R.s are at best inexact. The lesson is, that the A.P.R. can be a guide, but you need a mortgage professional, like flagship Financial to help you find the best loan for you and help you compare all the costs.

Finally it is important to note that when you're browsing for loan terms -- the A.P.R. will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. You'll also see that A.P.R.s on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time.