Is rate or APR more important?

Before we answer that question, it's important to understand the difference between the two.

Your rate is the percentage charged on the full amount of the loan. The APR, or Annual Percentage Rate, is calculated on the actual amount financed.

While your rate is fairly straightforward, APR is figured using a complicated calculation that isn't necessarily consistent from lender to lender. In general, the APR includes additional loan costs like points, pre-paid interest, loan-processing and underwriting fees, and private mortgage insurance. These monies are figured into the cost of the loan and a new percentage (the APR) is calculated. It's important to note that the APR doesn't affect your monthly payment, which is calculated using your interest rate.

What APR does is show you the true cost of your loan, including all the fees you.ll have to pay at closing. Federal Truth in Lending laws require lenders to disclose the APR on advertised rates. If there's a significant difference between the rate and the APR, then the additional costs for that loan are very high and you should consider other options.

It seems complicated, but here's our suggestion: when shopping for a loan, compare differences between the rate and the APR. Start by looking for a reasonable rate, then compare it with the APR. If the numbers are close (within half a percentage point), you're getting a good deal. If the APR is a lot higher, look elsewhere.