When shopping for a home loan, the number that tends to get most of your attention is the interest rate charged by the lender. The interest rate goes a long way toward determining how much you ultimately pay for your home. But a more accurate figure for what you’re truly paying can be found in the Annual Percentage Rate (APR). Remember that your interest rate and your APR are not the same thing.

That’s because your APR includes the interest rate, closing costs, points and other fees charged by the lender, while your interest rate is simply the true rate of interest on the loan only. However, not all lenders calculate APRs the same way. So when you start comparing, you need a good faith estimate of closing costs and any other fees or charges that are included or excluded from the APR.

Monthly Payments

Your interest on your home loan, not your APR, will determine your monthly mortgage payment. When you start comparing interest rates and APRs from various lenders, don’t lose sight of what your actual out-of-pocket expenses are at closing and with every month’s mortgage payment. You may not have a lot of money to cover upfront costs at closing, so some of those fees could be folded into the loan itself. That will obviously raise your monthly payments slightly, but spreading those costs out over a period of years may be easier for you if you have a limited amount of cash on hand.

On the other hand, a lender that offers a low interest rate and low monthly payments may have much higher costs and fees, which would raise the APR and possibly make the overall purchase more expensive. That’s why it’s worth looking at the deal from an APR and mortgage interest standpoint.

APR Limitations

The APR is based on the premise that you will keep the home for the entire term of the loan, which is often 30 years. However, most people don’t do that. If you think you’ll sell your home or at least refinance within seven years or so, the APR may actually be more expensive than it seems. This is important to remember if you’re comparing APRs offered by a variety of lenders.

An APR is also going to be a more accurate comparison tool with a fixed rate mortgage, because the interest rate component of the APR will remain unchanged from year to year. An adjustable rate mortgage is subject to changes in interest rates, which can change considerably over the life of the loan. A lender can try to predict how interest rates may rise or fall, but there are no guarantees.

Truth in Lending

The Federal Truth in Lending Act requires that lenders clearly and accurately post APRs next to any advertised loan rates. This is to help ensure that potential borrowers won’t be fooled by low interest rates, only to find out later in the mortgage application process that hidden fees will cost them much more than they anticipated.

The fees associated with a home loan, as well as other costs, such as real estate agent’s commission, home inspection costs and other expenses, can add up. And once you’ve found a home you like and are in the process of securing a loan, it can be difficult to back out. For this reason, take the time to talk about the APR, mortgage interest rate, monthly payments and all other associated closing costs with your lender and agent. Someone who has been through this process can often answer questions or make sure you get all the information you need to reduce the confusion and make sure you know exactly how much you’re paying for your home.