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When shopping for a mortgage loan, you'll see two different numbers used to represent interest rates. The mortgage rate is what the lender advertises; the annual percentage rate, or APR, is a more accurate statement of what you'll pay.
Mortgage Rate
The mortgage rate is simply the interest that accrues on the money you borrow. If your mortgage rate is 6 percent, that's the interest you'll be charged on the principal every year.
APR
Many, if not most, mortgages come with fees attached, such as origination fees, prepaid interest ("points") or private mortgage insurance. The APR factors in those fees to give you a more accurate picture of what it's really going to cost you over the life of the loan to borrow that money.
Adjustable Rate Mortgages
The APR is particularly helpful when looking at adjustable rate mortgages, which are advertised with low rates that last only for a short period at the start of the loan. Those loans later "reset" to higher rates that rise and fall with the mortgage market. In these cases, APR represents a reasonable estimate, but not a guarantee, of the effective rate.
Purpose
The APR gives people shopping for a mortgage a better way to compare the various mortgage products offered by different lenders.
Law
Mortgage lenders are required to disclose the APR by the federal Truth in Lending Act.
Source:
The Mortgage Professor's Web Site: Tutorial on Annual Percentage Rate (APR)
Federal Deposit Insurance Corporation: FDIC Law, Regulations, Related Acts
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