

APR is the government's attempt to confuse you. Just kidding. Sorta.
The APR (or Annual Percentage Rate) is the cost of obtaining a mortgage loan expressed as an annual rate. Its purpose is to show the total annual cost of a mortgage (including closing costs) over its full term (usually 30 years). APR is intended to be a tool to help customers compare the costs between different mortgage loans.
APR is not used to calculate your monthly payment. The interest rate that is used to determine your monthly payment is the note rate. APR is almost always different from the note rate because APR considers (some) closing costs along with the note rate. If your closing costs were $0, your interest rate and your APR would be the same.
Mortgage shoppers are confronted with APR as soon as they begin shopping for loans. Government regulations require lenders to disclose APR along with interest rates in advertising. Mortgage lenders are also required to disclose APR on a Loan Estimate when consumers apply for a mortgage loan.
Calculating APR
Theoretically speaking, if you were comparing two different mortgage loans, the loan with the highest APR would also have the greatest cost. The rationale of this rule is that the APR reflects both lender fees and the interest rate, and is therefore a more comprehensive measure of cost to the borrower than the interest rate alone.
The idea is to require lenders to provide one uniform set of price disclosures that are consistent from loan to loan, and from lender to lender. Then consumers can compare prices across loan types and across lenders.
So why doesn't it work?
Deficiencies with APR
On an adjustable rate mortgage (ARM), however, the initial interest rate holds only for a specified period of time. In calculating an APR, some assumption must be made about what happens to the rate at the end of the initial period.
Since nobody knows where interest rates will be at the end of the initial period, APRs for adjustable rate mortgage are hypothetical. In fact, the APR on some ARMs today are below their initial interest rates!
So should you ignore APR calculations? Definitely not! But I wouldn't use APR as my only method of comparing one loan program (or lender) to another. Carefully compare estimates of both closing costs and APR and ask your lender to explain any disparities.