If you're shopping for a mortgage and you're confused about why mortgage rates are quoted in terms of interest rate and APR, you're not alone. Quoting the APR – or Annual Percentage Rate – became industry practice as part of the Truth in Lending Act, a federal law passed in 1968 to protect consumers by requiring the full disclosure of the terms and conditions of finance charges in credit transactions.
The APR will give you a better idea of the total annual cost of your mortgage. That's because the APR includes not only the interest rate but also any other costs to get a mortgage such as discount points, insurance and closing costs. Given the same interest rate, higher APRs generally indicate more costs associated with getting a loan. Lenders disclose these costs usually in the form of fees and points.
The APR can also help you compare different loan options, comparing loans with different interest rates, fees and terms. For example, a loan with a lower stated interest rate may be a bad value if its fees are too high but a loan with a higher stated interest rate with low fees could be a good value.
While looking at the APR is an effective way to compare the total annual cost of a mortgage as you shop around, it's only one of the metrics you should look at. Learn more about understanding your costs.
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