Calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

The APR of a 30 year fixed rate loan, will be different than the APR of a 15 year fixed rate loan. Also, ask for the Good Faith Estimate (GFE), to compare the different costs associated with your loan. APR is just one factor in determining which loan is best for you.

Remember that your APR DOES NOT affect your monthly mortgage payments. Your monthly payments are based on the interest rate, and the length of the loan.

The APR is also defined as the cost of credit to the borrower in relation to the amount borrowed expressed as a yearly rate. This is required by the federal Truth in Lending Act, Regulation Z.

The APR is found on the Truth In Lending, a disclosure form that is required by law to be given to potential borrowers. Because the APR takes into considerations all the bank fees a lender charges, it is a good tool to compare different loan offers. For instance, one bank offers a borrower a mortgage loan with an interest rate of 6.25% with 1 discount point (meaning the borrower pays the bank 1% of the loan amount at closing in order to get the 6.25% interest rate), and another offers a loan with 6.5% interest rate and 0 point, how would the borrower know which to choose? Without consideration to the borrower's financial situation such as his cash reserves and how long he intends to live at the property, the loan with the lower APR is the better choice.

In other words the APR is the TRUE cost of the loan.

A good tool to compare loans across different lenders is the Annual Percentage Rate (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates

For an adjustable-rate loan, the APR assumes the loan's index doesn't change from its initial value.