Enter the loan amount, term, fees and discount points into NerdWallet’s calculator to determine the APR, or annual percentage rate, on a mortgage. APR is a loan-comparison tool that measures all the costs of a mortgage, including the interest paid over the life of the loan, origination fees and points.
Interest rate vs. APR
The interest rate is the percentage of the loan amount the lender charges for lending money. The APR reflects costs paid directly to the lender, which include the interest rate and loan-related fees, such as origination charges and discount points.
How is APR calculated?
APR is calculated in three steps:
- Add the fees to the loan amount.
- At the loan’s interest rate, figure what the monthly payment would be if you include fees in the loan amount rather than pay them upfront.
- Convert that “would-be” payment into an interest rate.
The result is the annual percentage rate. Here’s an example:
You get a $200,000 mortgage with an interest rate of 4%, and you pay $6,000 in upfront fees. The monthly principal and interest payment is $954.83. But if you added the fees to the loan amount, the monthly principal and interest would be $983.48. When you convert that “would-be” payment into a monthly and then annual rate, it comes out to 4.25%. The loan has an APR of 4.25%.
Should you compare mortgage rate or APR?
When comparing loan offers with the same terms and similar fees, the mortgage with the lowest interest rate is usually the best deal.
APR is a tool for comparing mortgage offers with different combinations of interest rates, discount points and fees. But it has an important limitation: The APR calculation assumes the borrower will keep the loan for its entire term. For a 30-year loan, the entire term is 30 years. But few people keep their mortgages for the entire term. Instead, they sell the home or refinance the mortgage before it’s paid off.
After you submit a mortgage application, the lender provides a three-page document called a Loan Estimate. Page 3 of the Loan Estimate has a “Comparisons” section that lists not only the APR but also how much the loan will cost in the first five years. This includes the loan costs, plus 60 months of principal, interest and any mortgage insurance.
The “Comparisons” sections of the Loan Estimates are useful in side-by-side comparisons of all the mortgage offers you receive.
Terms are listed in the order they appear in the calculator.
Loan term: The number of years it would take to pay off the loan with equal monthly payments.
Origination fee: What the lender charges for evaluating and preparing your mortgage loan.
Discount points: A payment to reduce the loan’s interest rate. The cost of one discount point equals 1% of the loan amount.
Other fees: Mortgage insurance and mortgage broker fees are included in the APR calculation. Not all loans include these charges.
APR: Annual percentage rate, used to evaluate the cost of the mortgage for the life of the loan, including interest rate, points and origination fees.
Principal and interest: The monthly portion of the house payment that goes toward paying off the loan balance, plus interest charges — excluding taxes and insurance.