Shopping for the least expensive mortgage can save you money and give you more purchasing power. To help you compare mortgage options, federal mortgage regulations require lenders to quote an interest rate that includes fees associated with a mortgage. This rate is called the annual percentage rate, or APR. The APR can help you compare the cost of mortgages and is slightly higher than your loan's interest rate.
Origination points, an amount paid to the lender for making the loan, and discount points, an amount paid to lower the interest rate, are included in the APR. Other charges used to calculate the APR include private mortgage insurance, application fee, appraisal, loan document preparation, credit report, and a settlement or closing fee. In general, the APR calculation includes fees charged in connection with financing a home purchase or refinance.
Lenders add the total interest paid on the mortgage to settlement fees, then amortize the sum over the life of the loan. The APR that results reflects how much you pay each year to finance your home.