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APR is the most important number to know when shopping for a mortgage because it reveals fees added to an interest rate.ย 

We'll discuss what APR means and the difference between APR and interest rate so you can feel confident in the home loan you choose to finance the biggest purchase of your life.

APR is an acronym for "annual percentage rate," which reflects the total borrowing costs of your mortgage. Essentially, it's what you pay on top of the principal balance you borrow.

Your mortgage interest rate is one component that gets factored into your mortgage APR, but since your APR is the full borrowing cost of your home loan on an annualized basis, it includes other expenses. Therefore, your APR will likely be higher than your interest rate.

Learn more: What is mortgage interest, and how does it work?

Other expenses that could be factored into your mortgage APR, besides your interest rate, include mortgage points, origination or underwriting fees, or select closing costs.

The mortgage points (if applicable), fees, and closing cost elements of your APR impact the amount of money you'll need when closing on a house. You'll pay for those expenses in cash to finalize your home loan.

The interest rate aspect of your mortgage APR influences your ongoing monthly payment amount. The higher your interest rate, the higher your housing bill (and overall home loan cost).

You may choose to pay mortgage points to lower your interest rate.

Yahoo Finance tip: APR calculations can vary from lender to lender, so it's wise to ask your financial institution what costs are reflected in the figures they provide. If you're looking to do a little research on your own, a good APR calculator can provide you with some estimates.

"I think mortgage APR is generally the best way to compare rates because APR includes the origination fees and closing costs," said Ted Erhart, certified financial planner and founder of Norris Lake Retirement Planning, via email interview.

"In other words," said Erhart, "it's an all-in 'price' for the loan. If you shop for mortgages online, you'll often see advertisements for what appear to be low rates. But if you look closely, the rate being offered comes with two, three, or even more origination points. Hence, the face rate is misleading because it doesn't include thousands of dollars of origination and closing costs."

Here are a couple of examples of how APR works, drawn from the Yahoo Finance weekly survey of lenders with the best mortgage rates:

Advertised 30-year fixed rate

APR

Discount points

Lender 'A'

6.25%

6.406%

0.625 point

Lender 'B'

6.25%

6.510%

2.26 points

You can see that both lenders begin with the same interest rate (before fees). Lender 'B' has a higher APR because they are charging more discount points (prepaid interest). APR clearly reveals the impact of fees.

You can find the mortgage APR on page three of the lender-provided Loan Estimate form. Your mortgage lender must give you a copy of this document within three days of receiving your mortgage application.

Yahoo Finance tip: Make sure you compare apples to apples when reviewing your mortgage options. Request that lenders provide Loan Estimates with no mortgage points included.

Read more: 6 tips for choosing the right mortgage lender

Since the interest rate is one of the main factors that influences your mortgage APR, here are some strategies that may reduce your cost to borrow:

Improving your credit score and reducing debt.

Always compare mortgage offers from several lenders. You may find a lender that charges fewer (or less expensive) fees than another.

The length and type of your mortgage can impact the APR you pay, too.

Dig deeper: Here's how to get the lowest mortgage rate possible

While it may seem counterintuitive, there are times when a higher mortgage APR may work in your favor.

"For instance, if the borrower plans to stay in the home for a short period, they might opt for a loan with higher fees (and thus a higher APR) in exchange for a lower interest rate. This strategy can be cost-effective if the lower interest payments outweigh the upfront fees over the time the borrower holds the loan," said Bryan Jordan, certified financial planner and managing partner of Censifi, via email.

Erhart said, "A higher APR could make sense for someone who is more concerned about monthly cash flow as opposed to the interest expense. For example, 15-year terms generally have lower rates and APRs than 30-year mortgages. But many home buyers are willing to pay a higher rate for a lower monthly payment." Of course, doing so may mean paying much more interest over the life of the loan.

Learn more: 15-year vs. 30-year mortgages

Mortgage lender fees are paid to the lender rather than third-party companies. Examples might be application or underwriting fees. Learn how lender fees work.

Mortgage amortization refers to paying down your loan in regular, fixed installments. Learn how to read a loan amortization schedule and understand your payments.

A bank account's interest rate is how much it earns in one year, while APY represents your total annual interest with compounding factored in. Read on to learn more about APY vs. interest rate.

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