Over four centuries ago, Francis Bacon, the English philosopher, said, “Knowledge is power.” Those words were never truer than in our modern world with its spider web of intricacies, especially when it comes to mortgage financing.

Last week we talked about mortgage lenders entering the mortgage market offering riskier home mortgage products than we’ve seen in a long time. This is especially true in the jumbo mortgage market place. Regardless of whether or not you’re applying for a regular conventional mortgage or a jumbo non-conforming mortgage, you still need to understand the difference between the interest rate and the annual percentage rate (APR).

Anyone who has ever read an ad or searched on line for mortgage rates will always see two rates – the interest rate and the APR. Since the interest rate is the number used to determine the monthly payment most homeowners don’t pay too much attention to the APR. However, the annual percentage rate is actually more informative as it relates to giving you the real cost of your mortgage.

The APR takes into account all the fees and charges you pay when you receive the mortgage and spreads those out over the life of the loan so that you know how much you’re actually paying. The APR takes the base interest rate and adds in other costs for getting a loan, including mortgage broker fees, prepaid interest and closing costs. This could increase the APR a quarter to a half point higher than the actual interest rate depending on what the fees are.

The APR can be used effectively to shop for a mortgage. It is very useful when comparing two different loans, especially when one has a relatively low interest rate and higher closing costs and the other has a higher interest rate but low closing costs. The mortgage with the lower APR is probably the better deal. But there are other reasons to choose a lender beyond interest rates and fees, including the level of service, cutting edge technology and convenience. Using the APR rate as a comparison tool should be a guideline rather than a final decision.

Not included in the APR calculation are fees for title search and title insurance, attorneys, notary, document preparation, home inspection, recording fees, transfer taxes, credit reports and the all important home appraisal. So yes the APR gives you a much truer picture of the cost of the loan, but not a truer picture of what the total cost of the loan really is.

The federal government requires banks to list the APR so that they can’t charge hidden or unexpected fees. Effective Aug. 1 lenders are required to use new forms created by the Consumer Financial Protection Bureau with the intention of making it easier for borrowers to find and understand the terms of their loan. The new forms also break down closing costs and indicates which third party services borrowers can shop around for, including title insurance companies in states where these fees are not regulated.

The annual percentage rate is certainly not the true cost of procuring a mortgage, which involves many fees and expenses outside of the actual loan process. However, at least understanding what it is will reduce part of the stress level involved in purchasing a home. Clear out the spider webs that can accumulate in your brain when obtaining a mortgage and leave room strictly for the knowledge.