When you apply for financing from a lender, whether from a bank or a private lender, you’ll soon receive your fair share of paperwork. Much of the paperwork is required by various lending regulations as well as state and federal statute while other documents highlight important details about your loan. And it’s no doubt that after reviewing your paperwork you’ll have a few questions. One of those questions addresses the annual percentage rate, or the APR.

 When any lender advertises a mortgage rate or quotes terms to a prospective borrower, the lender is required to provide not just the note rate but the APR. The note rate is the interest rate upon which your mortgage payments are based. The APR is a number that explains, or attempts to explain, the cost of money borrowed ainterest rates for investment propertynd expressed as an annual rate. Borrowers can sometimes get the APR and the note rate confused, but they are in fact two different numbers.

The APR includes not only the note rate but also includes specific finance charges needed to obtain the loan. For example, say you want a 30 year fixed rate loan for your investment property and the lender quotes a rate of 4.75 percent. If you borrowed $300,000, the principal and interest payment is $1,564 per month. But your lender required other fees before closing your loan.

The lender also charges $500 for an underwriting fee another $400 to process your loan request and a one percent origination fee for a total of $3,900 to get your $300,000 loan. These additional costs of funds are included when calculating the APR. In this example, the APR is 4.86 due to the additional finance charges. Your monthly payment is still based upon your note rate of 4.75 percent, but the APR considers the additional fees and expresses those in an annual interest rate.

In effect, the greater disparity between the note rate and the APR, the higher the finance charges associated with the loan. Used properly, the APR number can be used to compare different mortgage quotes for the same loan program when you’re getting mortgage quotes from two different banks. It can be confusing at first, but once understood, its purpose becomes clear.