The answer to this problem is the Annual Percentage Rate or APR. The Annual Percentage Rate was developed under federal law to let you know how much interest you will actually pay on a loan over the life of the loan. Once you know the actual amount of interest that you will pay on a loan it makes it easy to compare one loan to another. The Federal Truth in Lending Act requires all banks and lenders to provide you with the APR within 3 days of you filling out a loan application.

To figure out the APR on a mortgage you take the average annual finance charge and divide that by the principle of the loan. The APR on a loan is higher then the interest rate the bank charges because the APR includes fees that came along with the mortgage. These fees usually include Private Mortgage Insurance (PMI), points, origination fees and others.

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