The APR, or annual percentage rate, is the interest rate used to compare loan programs from different lenders. By no means should you assume that the APR advertised by a bank is the rate you are going to get on a loan!

The Federal Truth in Lending law requires all mortgage companies to advertise their APR when advertising a rate, so you can compare the rate you actually get with their APR.

An APR is actually the true cost of a loan. It tells you what the basic rate really is, less fees and other charges. Each lender complicates things by calculating their APR differently, so a lower APR at Bank X is not necessarily a better deal. Instead, you should ask your prospective lenders with a good-faith estimate of their costs on a loan similar to the one you are considering, with the same interest rate. This will give you your rate, plus a bunch of fees itemized out. Delete all fees independent of the loan, like homeowners insurance, title fees, escrow, attorney's fees, etc. Add up all the fees left over and then compare your results. The lender with the lowest overall number is offering the cheapest loan.

Fees Included in the APR

• Discount and origination points
• Pre-paid interest, or interest paid from the date the loan closes to the end of the month
• Loan-processing fee
• Underwriting fee
• Document preparation fee
• Private mortgage insurance (PMI)

Fees Sometimes Included in APR

• Loan Application Fee
• Credit Life Insurance (guaranteeing that the mortgage will be paid off even in the event of the borrower's death

Fees Usually Not Included in APR

• Title/Abstract fee
• Escrow fee
• Attorney and notary fee
• Document preparation (which should be charged by the closing agent)
• Home inspection fees
• Recording fees and transfer taxes
• Credit report
• Appraisal fee

Your APR will not say how long your rate is locked in, so check this. A short-term lock of ten days should be offered at a lower APR than a longer-term lock of a month or more. Adjustable and balloon loans make it hard to calculate real APR because future rates are unknown. In general, though, a lower APR is going to be a better lender.

Fifteen and thirty year loans are not comparable through APRs. And not all lenders know what is included in the APR because it's all done through company software. The same lender may use two software programs to calculate APR – and come up with two different numbers.

An APR is not the price on the shelf for a loan. It's only a starting point for loan comparison, and should be viewed as the result of a complex, obscure calculation. A good-faith estimate from your lenders is the best way to compare costs.