Borrower bewilderment over this mystical APR figure usually manifests itself in common questions like, “Is this figure my actual interest rate?” and “Why is the APR so much higher than my mortgage note rate?” Hopefully, this brief explanation will help you know how and when this APR figure may be helpful.

APR is the “effective” annual interest rate borrowers realize over the entire life of their loan. It is based on the mortgage type and interest rate, its amount and term, and the buyers’ total closing costs. The APR represents the interest rate that borrowers “feel” after factoring in their loan’s costs. The closing costs on a small mortgage amount will yield a much higher APR than would the same very same closing costs calculated for a mortgage with a higher loan amount.

Looking to the extremes, the APR for a “no-cost” mortgage (if there truly were such a thing) would be the same as the mortgage note rate. Meanwhile, an infinitely large loan amount would also force the APR and note rate be equal. At all other times—essentially always—the APR and your mortgage note rate will differ, and the APR will almost always be higher.

Using the APR to mortgage shop is useful only when comparing loans of similar type, amount and term. APRs become less useful when any of these factors change, and they almost completely lose their utility when considering adjustable-rate products and mortgage hybrids.

Since APR figures make no provision for changes in your payoff schedule or potential future refinances or home sales, making mortgage decisions based purely on APRs can result in terribly poor financial decisions. Borrowers would be much better served to ask their mortgage loan officer to fully explain the details of their mortgage selection as they relate to the borrowers’ specific financial goals.

Timothy Phillips is a mortgage banker and newspaper columnist.  Homebuyers should always consult a professional for guidance specific to their situation.