Calculation of interest is one of the most confusing aspects about mortgages and other kinds of loans. With several variable factors including compounding, terms and other factors, it becomes hard to compare one mortgage with another. For example, it can get tricky if you want to compare a 30-year fixed-rate mortgage at 7 per cent with one point to a 15-year fixed-rate mortgage at 6 per cent with one-and-a-half points. Besides the interest payments, you also have to keep in mind the fees and other costs associated with each loan. Luckily, there is an option available. The Federal Truth in Lending Act requires all lenders to disclose the effective percentage rate as well as the total finance charge in dollars.

The annual percentage rate (APR) allows you to make real comparisons of the actual costs of loans. The APR is the average annual finance charge (including the fees and other associated loan costs) divided by the amount borrowed. As the name suggests, it is expressed as an annual percentage rate. The APR is slightly higher than the interest rate being charged by the lender, because it includes all (or almost all) of the other fees that are associated with the loan carries, such as the origination fee, points and PMI premiums

While looking for a mortgage with the best interest rates, remember to ask for the APR and compare this figure with other lenders. Also, find out which fees are being included in the APR calculation. Usually these include the origination fees, points, buy-down fees, prepaid mortgage interest, mortgage insurance premiums, application fees and underwriting. These fees are levied directly by the specific lender and not included in the fees that you would have to pay, irrespective of the lender, such as title insurance, appraisals, etc.

Until recently, mortgage interest rates were at a multi-year low and this triggered a huge housing boom. However, with the several increases in interest rates by the Fed, mortgage rates have climbed and this is likely to cool the real estate market.