The Federal Truth in Lending Act requires that all financial institutions disclose the APR (annual percentage rate) when advertising a rate. The APR is designed to present the actual cost of obtaining financing by requiring that some, but not all, closing fees are included in the APR calculation. These fees, in addition to the interest rate, determine the estimated cost of financing over the full term of the loan.
Unfortunately, the APR doesn’t include all the closing fees, but the APR can be compared to other loan programs for a consistent comparison. Fees for things like appraisals, title work, and document preparation are not included, even though you’ll probably have to pay them.
For adjustable rate mortgages, the APR can be even more confusing. Since no one knows exactly what market conditions will be in the future, assumptions must be made regarding future rate adjustments.
You can use the APR as a guideline to shop for loans, but you should not depend solely on the APR in choosing the loan program that’s best for you. Look at total fees, possible rate adjustments in the future (if you’re comparing adjustable rate mortgages), and consider the length of time that you plan on having the mortgage. Don’t forget that the APR is an effective interest rate — not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow, and the term of your loan.