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The APR (also known as the annual percentage rate)
describes the total cost of a mortgage, including closing costs
and lender points, over the full term of a loan. Lenders
are required by law to show a loan's APR.
Home buyers often use the APR to compare mortgages from different
lenders. There are two potential problems with this practice.
Different lenders may include different fees in their
calculation, skewing the comparison. As a result, it is
important for the home buyer to make
sure that the APRs being compared include similar
The APR is computed over the full term of the loan;
however, home buyers seldom keep their homes for the full
term. The loan with the most favorable APR over the full
term is not always the least expensive loan over a shorter
time period. A better strategy is to compare loans, based
on the total cost over the period that the home buyer owns
the home. To see how how to find the total cost of a mortgage over any
time period, read the
total mortgage cost case study.