New Home Finance Guide: Annual Percentage Rate Explained

If you are a first time home buyer, interest rates can be a bit confusing. You'll get an interest rate quoted from your lender which isn't going to be the rate that you'll actually be paying on your mortgage. The reason for the difference, is that you must tack onto the quoted interest all the costs associated with getting the loan. That amount will be, of course, different and higher. This higher number is what is referred to as the annual percentage rate or APR.

All lenders are required by Federal law to provide the APR and a breakdown of loan costs to borrowers within 3 days of receiving a loan application. Consequently, this makes for a great comparison tool when shopping around for a loan.

For example - 2 lenders, over the phone, quote you the same interest rate. But when you get their APR statement in writing, things may look very different. Lender A's loan could be more expensive than lender B's loan, because lender A has added in higher loan fees.

Also, different Loan types will result in different APR levels. An example of this is the FHA loan. The APRs for this type of loan are about 1/2% higher due to the built in insurance premium that most APRs will quote.

A 20% down APR is lower that a 5% down loan because of the PMI (private mortgage insurance), required with the lesser down payment (higher risk to the lender).

Because of different loan variations resulting in different APRs, you will need to compare similar loan programs with the same down and loan type.

When going for a mortgage to purchase your new home, compare apples to apples. The actual APR will boil down to what the lender tacks on in loan fees. Don't hesitate to shop around for the best rate - quoted in writing with fees broken down.