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Annual Percentage Rate (APR) is a tool that consumers can use as a starting point to compare loan programs. However, it's important to keep in mind that APR is not a perfect system, and not all lenders calculate APR in the same way. While the Federal Truth-in-Lending Act does require any mortgage broker or lender to disclose APR to the consumer, there is no rule for calculating this number that each and every lender agrees upon.

The point of calculating the APR is to let the consumer know what the actual cost of their financing is in the form of a yearly rate. APR factors in certain closing costs and fees associated with the loan, and spreads this total over the life of the loan along with the actual note rate. The objective is to give the consumer a clearer picture of what their actual costs are, and this inhibits lenders from hiding fees or upfront costs behind low interest rates in their advertising.

Fees that are generally included in the APR calculation are points, pre-paid interest, loan processing fees, underwriting fees, document preparation fees, and private mortgage insurance. On occasion, lenders will include a loan application fee. Fees that are normally not included in the APR calculation are fees from Title, Escrow, attorney, notary, document preparation, home inspection, recording, transfer taxes, credit report and appraisal.

Remember, all lenders do not perform the calculation the same way.  Calculating APRs on adjustable rate and balloon mortgages is more complex because there is really have no way of knowing what future rates will be.  Your loan officer should be prepared to answer questions about why the APR is higher than the interest rate on the loan in most cases.  

More important, ask yourself how long you plan to stay in the home.  Assess your long term goals.  How long is the loan needed?  If you will only need the loan for a short period and then you will refinance, then taking the APR into consideration may not be realistic.