Tip of the Day: Understanding Your APR

Feb. 16, 2011 — -- Do you find your mortgage rates, insurance and fees confusing? Check out the tips below.

APR simply reflects the annual interest rate that is paid on a loan. APY takes into account how often the interest is applied to the balance, which can range anywhere from daily to annually.

You'll typically see one (APR) cited in relation to mortgage loans and the other (APY) in regard to interest-bearing accounts.

APR definition: "The yearly cost of a mortgage, including interest, mortgage insurance, and the origination fee (points), expressed as a percentage."

APY definition: "The effective annual return. The APY is calculated by taking one plus the periodic rate raised to the number of periods in a year. For example, a 1% per month rate would offer an APY of 12.68%."

Source: FinancialTips101