What is APR and can I use it to compare lenders?

APR stands for Annual Percentage Rate.  By law, the APR must be disclosed along with any interest rates appearing in advertisements, and also must be disclosed to a borrower within three days after the receipt of an application.

When you receive a Truth in Lending disclosure after submitting an application, the APR will be shown as higher than the interest rate on your loan, unless you are applying for a No Closing Cost loan. So do not let it confuse or panic you.

The APR theoretically represents the real cost of credit by taking into account not only the interest rate, but also certain upfront costs paid to obtain a loan, calculated over the term of the loan.  It was instituted as a means for consumers to see the total cost of  credit computed as interest and to more easily compare credit offerings.

While it can be useful to a certain extent in comparing loans, such as raising a red flag when there is a glaringly wide spread between a lender's APR and the offered interest rate (Annual Interest Rate), there are some shortcomings.

For one thing, the APR is calculated for the full term of the loan, so it is not the best indicator of your cost if you will be moving, selling your home, or paying off the loan in a shorter period of time.  And at the time of its introduction, Adjustable Rate loans were not a significant part of the home buying landscape. The effectiveness of using APR in comparing Adjustable Rate loans is arguable.

Additionally, it is unclear as to whether all lenders include all of the same fees in the calculation.  It would not be surprising to find two lenders with identical interest rates and fees, yet different APR's.  This is not necessarily the result of any attempts to deceive, but likely more a matter of data entry errors or exclusions.

Looking at the APR is one of the tools available, and while somewhat helpful, it is not a complete or always reliable approach. In the end, there is no substitute for doing your homework and performing a proper comparison between available rates and fees.

For more information on good shopping practices, take advantage of the FREE ONLINE REPORT, which includes "Comparing Loans and Lenders - How to Really Shop for a Mortgage".