What does APR stand for, and why is it important?

The term APR stands for Annual Percentage Rate, and it plays a crucial role in the mortgage lending process because it communicates the overall cost of borrowing in a standardized format. The APR incorporates not just the interest rate on the mortgage itself but also includes other associated costs such as loan origination fees, points, and any other charges that you may incur while securing the loan. By representing these costs as an annual rate, the APR allows borrowers to more easily compare different loan offers, regardless of the specific fees or interest rates.

Understanding the APR is vital for consumers because it reflects the true annual cost of borrowing and allows for more informed financial decisions. Unlike the interest rate, which only reflects the cost of borrowing the principal amount, the APR provides a more comprehensive view that can significantly impact the total repayment amount over the life of the loan. Therefore, knowing what the APR is and how it functions can help borrowers not only evaluate different options effectively but also help them gauge the long-term affordability of a mortgage.