The first thing to know is that federal law requires the lender to disclose both of them to you. So what are they?
Lets say you are trying to compare rates for a few different lenders. The A.P.R. is a tool for comparing these different loans. It includes different interest rates but also different points and other terms.
What you should know is that the A.P.R. is supposed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate. By doing this, lenders can’t “hide” fees and upfront costs behind low advertised rates.
However, be careful. The A.P.R. can be confusing. The reason? It includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. In addition, it will not tell you about prepayment penalties, balloon payments or how long your rate is locked.
Since the federal law does not clearly define what goes into the A.P.R. calculation, they can vary from lender to lender and loan to loan. So, A.P.R.s definitely have some flaws. What you really should do is have your mortgage professional help you find the loan that truly meets your needs. They can navigate the waters for you and give you the un-biased advice you need.