What exactly is APR, and how does it affect you?

APR is the acronym for Annual Percentage Rate, which will be different,
and higher, than the interest rate that you were initially quoted for a loan. APR is essentially the annualized cost of credit, and takes into account the  upfront costs such  as points, closing costs, and prepaid interest. Once you lump those additional  costs together and deduct that from the amount you are borrowing, the interest  rate is recalculated with your same monthly payment less those additional costs, thereby increasing the actual interest rate you are paying.

Let's say for the sake of argument that you were quoted an interest rate of 5% for a $500,000 loan that is to be amortized over a 30 year period.

Your monthly principal and interest payments would be approximately $2,684.11 You would actually pay back almost the full loan mount over the life of the loan.  (the total is $966,278.27 for those inquiring minds) If you paid two points to  obtain the loan and an application fee of $400, plus pre-paid interest in the amount of $1500, then technically you have paid $11,900 for the opportunity to do business with the bank. If that is the case, the monthly payment is actually calculated on the $500,000 less the $11,900 that you have already paid. Your principal balance  remains unchanged, and your payment also remains unchanged, so the interest rate is then calculated on $488,100. If you are paying $2,684.11 on a loan amount of $488,100,  then the interest rate under those circumstances works out to be 5.014%

he Truth-in-Lending Act requires that all creditors, including banks  and other financial institutions  provide a borrower with a loan's total finance  charges and annual percentage rate. These two pieces of information will give you the information and knowledge you'll need to compare the  offerings of various lenders. Remember, interest rates are only  comparable when they've been calculated in the same manner.