What Is APR and How Does It Affect Your Mortgage?

Annual percentage rate, or APR, reflects the true cost of borrowing. Mortgage APR measures costs including the interest rate, points and fees charged by the lender. APR is higher than the interest rate because it encompasses all these loan costs.

Here’s a primer on the difference between APR and interest rate, and how to use it to evaluate mortgage offers.

» MORE: Looking for information on credit card APR?

Interest rate vs. APR

Knowing the APR helps you compare offers as you choose the best mortgage lenders to work with.

• Interest rate: The percentage that reflects the basic cost a lender charges annually for lending you money. 

• APR: The interest rate plus the fees you paid directly to the lender or broker or both (i.e. origination charges, discount points and any other costs). It’s calculated using a formula found in Appendix J of Regulation Z, also known as the Truth in Lending Act, which requires lenders to disclose loan charges and fees.

Mortgage fees add to the cost of the loan, and APR takes them into account. That's why APR is higher than the interest rate.

Calculate your mortgage APR

You don’t have to wait for a Loan Estimate to get a sense of your total loan costs on top of the basic interest rate. Plug various rates, costs and fees into our APR calculator to compare scenarios before submitting your loan application.

APR comparison

APR is a tool that lets you compare mortgage offers that have different combinations of interest rates, discount points and fees. Comparing APRs is most useful when you plan to keep the loan for more than five or six years. That's because the APR calculation assumes that you'll keep the loan for its entire term. But not every borrower does that. Most people sell the home or refinance the loan before it's paid off.

As a hypothetical example, let's say you're comparing two offers on a $200,000 loan for 30 years:

• Loan A: You could borrow $400,000 with an interest rate of 6.5%, paying a 1% origination fee of $4,000, with no discount points and $2,000 in other fees. Total fees: $6,000.

• Loan B: You could buy a discount point to reduce the interest rate. In this offer, you could borrow $400,000 with an interest rate of 6.25%. You would pay a 1% origination fee of $4,000, another $4,000 for one discount point and $2,000 in other fees. Total fees: $10,000.

Bottom line: Loan A has a higher interest rate and lower fees, while Loan B has a lower interest rate and higher fees, so how do you compare them?. As you see in the table below, Loan B has a lower APR, which means that you would end up paying less over the 30-year life of the loan when you include principal, interest and upfront fees.