Interest Rate
The interest rate is the yearly rate a lender charges for permitting the borrower to use money for a specific length of time. The rate is calculated by dividing the total amount of interest charged by the loan amount. For example, if a lender charges a customer $60 a year on a loan of $1000, then the interest rate would be (60 ÷ 1000) x 100% = 6%.

Annual Percentage Rate
Annual percentage rate (APR) is the annual interest rate you pay on your loan and is the rate used to calculate your monthly payments. The amount of interest you pay is only one of the costs associated with your loan; there may be others.

Your APR includes both your interest and any additional costs or prepaid finance charges you might pay such as prepaid interest, private mortgage insurance, closing fees, points, etc. It represents the total cost of credit on a yearly basis after all charges are taken into consideration.

It will usually be slightly higher than your interest rate because it includes these additional items and assumes you will keep the loan to maturity.

When shopping for a mortgage--especially if it's your first time--it's important to understand the terminology surrounding the mortgage process. So do your research. Find out as much as you can so that you understand the loan process to make an educated and informed decision when it comes time to choose a loan and lender.

The A.P.R. is a tool for comparing different loans, which will include different interest rates but also different points and other terms. 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.

What fees are included in the APR?

The following fees ARE generally included in the APR:

• Points - both discount points and origination points
  
• Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
  
• Loan-processing fee
  
• Underwriting fee
  
• Document-preparation fee
  
• Private mortgage-insurance

The following fees are SOMETIMES included in the APR:

• Loan-application fee
  
• Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)

The following fees are normally NOT included in the APR:

• Title or abstract fee
  
• Escrow fee
  
• Attorney fee
  
• Notary fee
  
• Document preparation (charged by the closing agent)
  
• Home-inspection fees
  
• Recording fee
  
• Transfer taxes
  
• Credit report
  
• Appraisal fee