What is the difference between the interest rate and the A.P.R.?

You'll see an interest rate and an Annual Percentage Rate (A.P.R.) for each mortgage loan you see advertised. The easy answer to "why" is that federal law requires the lender to tell you both.

The A.P.R. is a tool for comparing different loans, which will include different interest rates but also different points and other itemized costs. The A.P.R. is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.

While it's designed to make it easier to compare loans, it's sometimes confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.

The A.P.R. on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs are by nature variable. Because of this, A.P.R.s on adjustable rate mortgages are at best inexact. The A.P.R. can be a guide, but it can also be deceiving.

Be aware that not all mortgage brokers disclose all charges, nor do they accurately estimate closing costs. So, if you compare their APR against mine, mine might be higher, but they may not be disclosing all of their fees or estimating as accurately as I do. No one likes surprises, especially when it comes to costs they expect, so I take great care in accurately estimating the closing costs that will be reflected in your A.P.R. and on your Good Faith Estimate.