The APR reflects the cost of a loan on a yearly basis. It includes interest and many of the charges incurred at the time of closing. The APR can be used to compare loan programs from different lenders. The Federal Truth in Lending law requires that mortgage companies disclose the APR when they advertise a rate. The APR does not effect monthly payments.
Monthly payments are a function of the interest rate and the length of the loan.
It is meant to create a level playing field for lenders and protect consumers. It prevents lenders from advertising a low rate and hiding fees. Many mortgage companies assume 15 days of interest in their calculations. Some lenders offer low interest rates but have fees that add to your borrowing costs, which may increase the annual percentage rate. The lower the APR, the lower the cost of credit.