The APR is a confusing number when mortgage shopping, it was originally designed to estimate your costs over the course of an entire year. The Federal Truth in Lending law requires mortgage companies to disclose the APR of loans when they advertise an interest rate. This was supposed to prevent them from advertising low interest rates and tacking on other costs that drive up the real cost of the loan.

A proper APR disclosure should include the following fees:

Discount Points. Commonly referred to as "points," these are increments of 1 percent of the mortgage that you pay at closing to lower your rate. True discount points can only be used to lower your rate and not as broker compensation.

Origination Fees. Often confused with points, this is a fee the lender charges for work they perform on the borrower's behalf. A "No Point" loan does not necessarily mean there is no origination fee.

Mortgage Insurance Premiums. This is insurance against defaulting on payment of the loan. Your lender may require you to pay mortgage insurance if your down payment is less than 20 percent of the selling price of the home.

Prepaid Mortgage Interest. Since interest is generally paid on a monthly basis and in arrears, prepaid mortgage interest is paid at closing to cover the gap between the time you close and the first of the next month.

The APR your lender quotes you should also include other fees such as escrow fees, notary fees and various other closing costs, but APR doesn't tell the whole story. There are other fees and costs, such as title insurance that are not included and mortgage originators can choose what fees they want to include without disclosing what they are. APR is little more than an estimate of the various costs of your loan, including the interest rate and it's not an exact science and unfortunately it's easily manipulated.

While APR is a good place to start comparisons, the best way is still to compare 2 loan programs side by side. Compare the rates and add the fees. If Loan A has a rate of 4.5% with $5000 in fees and Loan B has a rate of 4.5% with $6,000 in fees, It is impossible for Loan B to have a lower APR than Loan A unless it's being manipulated. Use your common sense and do the math yourself.

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