Annual percentage rate can be defined as the effective interest rate on the loan or the actual cost of credit to the customer. APR is usually determined as an annual percentage of the amount of credit granted while taking into account the one time fees. APRs seldom have any effect over the monthly mortgage payments since different lenders have different methods of calculating APRs.

Annual percentage rate provides an estimate to the borrower regarding the total annual payment including the interest that has to be paid to the lender. APR is calculated through complex mathematical equations. Expenses that are considered during these calculations include discount points accumulated during closing, loan origination fees, mortgage insurance premiums, documentation fees, underwriting fees and any prepaid interest if levied. Several lenders consider these calculations as confusing.

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