When taking a mortgage, you must pay back to the lender not only the money directly borrowed, but also interest and other fees this is known as the "cost of credit," just another way of saying "the cost of borrowing money." This seems like a simple concept, but is often confusing and convoluted when borrowers actually need to shop for a mortgage. This is because there are so many potential fees and other costs that could apply to any specific mortgage, so comparing them directly is nearly impossible. In order to combat this confusion, the Truth in Lending Act regulates the APR or Annual Percentage Rate. The APR is an attempt to be an expression of the cost of borrowing money, and usually includes the interest rate, points, origination fees, etc.
Essentially, the purpose of the APR was so that borrowers shopping around for a mortgage could easily compare different lenders in terms of the total cost of the loan. However, some argue that the APR is not a true illustration of the total cost of borrowing. For instance, the APR usually does not include one-time feeds that are paid to someone besides the lender, such as attorney's fees, late penalties, appraisal feeds, or credit report costs. While this is not true of every lender, those that do not disclose all the necessary fees in the APR make it harder for the customer to get an accurate comparison of different companies.
Some shoppers for mortgages should ignore the APR, including those who expect to sell or refinance within a short period, those looking to raise cash, and those who need a high-rate loan or negative points. These individuals should pay closer attention to specific prices for fees and work out the best mortgage individually.