The annual percentage rate is intended to allow a customer to compare the interest rates of different mortgage loans.

For example, two lenders may offer:
-$200,000 loan
-6% interest
-the payment for each loan will be the same

However, one lender may charge $5,000 in closing costs as part of the deal, while another lender offers closing costs of $2,500.

The annual percentage rate is supposed to factor in these closing costs to give you the "true cost" of the loan.

The lender in this example with the higher closing costs will have a higher annual percentage rate. It is important to note that the monthly payment on your loan is based on the "note rate" which is the interest rate stated in your loan documents (in this case 6%).

Different Factors Involved In The Annual Percentage Rate (APR)

In the annual percentage rate you can have the following closing costs (there are also others):

-origination fees -points -prepaid interest -mortgage insurance premiums -buy down funds -flood check funds -tax service fees -other fees

The greater these charges are the higher your annual percentage rate will be.

Lenders can have slightly different methods of calculating what the annual percentage rate will be.

How To Use The Annual Percentage Rate To Your Benefit

The annual percentage rate is not the only way you should compare loans.

A higher annual percentage rate may be appropriate if you have other additional benefits. For example, you may choose to pay some loan fees up front so that you will not have a prepayment penalty. If you plan on moving out of the property or selling it within a shorter time frame, then structuring a loan this way makes sense.