The annual percentage rate (APR) gives you the yearly cost of a mortgage in the form of a percentage. The rate calculations include interest, mortgage insurance, and the origination fee (points).

The APR has two main purposes.

1. it allows borrowers to compare loan programs from different lenders so they can see which program is the cheapest.

2. It creates a "level playing field" for lenders. And, three, it prevents lenders from advertising teaser rates and hiding fees from consumers.

The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise their rates. Typically the APR is found next to the rate; for example, "30 year fixed...8%...1 point...8.107% APR."

APRs can be useful for consumers in determining the cost of a mortgage; however, they do have one problem you need to be aware of, and that problem is that APRs can be very confusing because different lenders calculate APRs differently! This means that a loan with a lower APR may not actually have a better rate.

To find out the truth about a particular APR on a loan, you have to do digging and calculations on your own.

The first step is to ask lenders for a good-faith estimate of their costs on the same type of loan (e.g. 30-year fixed) at the same interest rate.

Once you have the estimate, the second step is to delete all fees that are independent of the loan (e.g., homeowners insurance, title fees, escrow fees, attorney fees, etc.

The third step is to add up all the loan fees and then choose the lender with the lowest loan fees.

You may wonder why there's so much confusion about APRs. Well, there are several reasons

Reason 1:

The rules to calculate APR are not clearly defined.

APR is calculated using a complex formula prescribed by the Consumer Credit Act (1980). But, there are three different ways of calculating the Annual Percentage Rate! Lenders must inform you of the APR calculation method before you sign a loan agreement, but that doesn't mean it's easy to understand.

Reason 2:

It's not always clear what fees are included in the APR.

The following information about fees will show you what I mean.

A. Fees generally included in the APR are:

1. Points - both discount points and origination points a. Pre-paid interest. Note: This is the interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, some will use any number between 1 and 30.

2. Loan-processing fee

3. Underwriting fee

4. Document-preparation fee

5. Private mortgage insurance

B. Fees sometimes included in the APR:

1. Loan-application fee 2. Credit life insurance (insurance which pays off the mortgage in the event of a borrower's death).

C. Fees not normally included in the APR:

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