Q.What are annual percentage rates (APRs) on mortgages? I've read that APRs should be compared when searching for a loan but do not affect your monthly payment.

A.In theory, the APR is a way to reflect the total cost of a loan once all of the points, fees and other costs are taken into account.

That cost is expressed as an annual percentage rate that will be higher than the interest rate on the loan and should allow borrowers to compare loans that have different interest rates and fees. The lower the APR, the better the deal.

In practice, the APR is slanted toward loans with low interest rates and high fees, which aren't the best loans for the typical borrower. For more on how this works, check out our warning to be cautious when comparing APRs.

Here's a simplified example of how APRs are determined:

Let's say a lender will give you a $100,000 loan at 8% but will charge $2,000 in associated fees. To get that loan, you would have to part with $2,000 of your own money, so you are really only getting $98,000 in new money.

Your loan payments, however, are based on $100,000. At 8%, your monthly payment would be about $734. If you were to make a $734 payment on a $98,000 loan, the lender would have to charge you an interest rate of 8.21%. So your actual cost for this loan is 8.21% -- that's the APR.