The short answer
When a lender quotes you a rate, they also have to show an APR on the Loan Estimate. The two numbers answer different questions. The rate answers, “how much interest do I pay on the balance?” The APR answers, “what is the yearly cost of this credit once certain fees are included?” The Consumer Financial Protection Bureau explains that the APR is usually higher than the rate because it reflects points, broker fees and other charges you pay to get the loan.
Because the APR is built from a standard formula, it lets you put two quotes on the same footing. But it is a comparison tool, not a bill. It does not tell you your payment, how much cash you need at closing or what the loan costs if you move in five years.
Four numbers that are easy to confuse
Lenders, borrowers and agents often use these loosely. They are four separate things:
| Number | What it is | What it is good for |
|---|---|---|
| Note interest rate | The rate written into the loan. It sets the interest charged and your monthly principal and interest. | Knowing your payment and how fast the balance falls. |
| APR | The yearly cost of the loan as a rate, including the interest and certain finance charges, assuming the loan runs to its end. | Comparing similar loans on a common basis. |
| Cash to close | The money you bring on closing day: down payment plus closing costs, prepaids and escrow deposits, less credits. Many of these are not in the APR. | Knowing whether you can afford to close. |
| Total borrowing cost | The dollars the loan costs over the time you keep it: fees plus interest plus mortgage insurance. The Loan Estimate also prints a Total Interest Percentage. | Deciding between a low-fee loan and a low-rate loan. |
See the interest rate and Loan Estimate glossary entries for short definitions.
A side-by-side example
Here are two quotes on the same $400,000, 30-year fixed loan. Both have $2,500 of lender fees that count toward the APR. Offer B pays one point ($4,000) to get a lower rate. Assume the title, appraisal and other third-party costs are identical, so they cancel out.
| Offer A | Offer B | |
|---|---|---|
| Interest rate | 6.75% | 6.25% |
| Discount points | 0 | 1 ($4,000) |
| Lender fees in the APR | $2,500 | $2,500 |
| Monthly principal & interest | $2,594 | $2,463 |
| APR | 6.811% | 6.406% |
| Fees and interest if you leave after 2 years | $55,943 | $55,933 |
| Fees and interest if you leave after 3 years | $82,198 | $80,178 |
| Fees and interest if you leave after 10 years | $255,031 | $238,995 |
Offer B has the lower APR and the lower payment, by about $132 a month. But it costs $4,000 more to close. Counting fees and interest, the two loans cost almost exactly the same at the two-year mark, and Offer B pulls ahead after that. If you expect to sell or refinance within about two years, the lower APR does not help you; if you stay, it does. That is the break-even idea, and it is why the APR should never be the only number you look at.
Mortgage APR comparison
Enter two Loan Estimates to see each APR, the monthly payment and the month one offer starts costing less.
The calculator loads as you scroll. Open the full APR calculator if you prefer.
Assumptions
- Fixed-rate loans with equal monthly payments.
- APR follows the Regulation Z method; only fees you place in an APR category count toward it.
- Estimates only: your Loan Estimate controls.
What the APR includes (and what it leaves out)
Regulation Z defines the APR using the “finance charge,” the cost of credit, so only some closing costs count. Here is a $300,000, 6.5% loan with typical fees:
| Cost | Amount | In the APR? |
|---|---|---|
| Origination fee | $1,800 | Yes |
| Underwriting and processing | $1,200 | Yes |
| Discount points (0.5) | $1,500 | Yes |
| Prepaid (per-diem) interest | $700 | Yes |
| Title insurance and settlement | $2,500 | No (third-party) |
| Appraisal | $700 | No (third-party) |
| Recording fees and transfer taxes | $800 | No (government) |
| Prepaid homeowner's insurance, property taxes, escrow deposits | $4,000 | No (cost of owning) |
The $5,200 of finance charges lifts the APR from 6.500% to 6.669%. Without the half point, it would be 6.620%. The $8,000 of other costs does not change the APR at all, yet you still need that cash. Notice what did not happen: the APR is not 6.5% plus the fees as a percentage of the loan. The fees are treated as a reduction in the amount you receive, and the APR is the yearly rate that makes your payments repay that smaller amount. You can reproduce it with the mortgage APR calculator.
Lender credits
A lender credit lowers your upfront costs in exchange for a higher rate. When it is applied against finance charges it reduces them, which lowers the APR; but it also raises the note rate, so the loan can still cost more over time. Credits from a seller are different: they help with cash to close and do not change the APR. See mortgage points and credits for the trade-off.
How mortgage insurance changes the APR
Monthly mortgage insurance is a finance charge, so it is counted in the APR for the months it is scheduled to be paid. That is why two loans with identical rates and fees can show different APRs.
Example: a $380,000 loan on a $400,000 home at 6.5% over 30 years with $3,000 of finance-charge fees has an APR of 6.576% with no mortgage insurance. Add conventional PMI of $190 a month until the scheduled balance reaches 78% of the home’s value (about month 135) and the APR becomes 7.047%. The note rate and the principal and interest payment did not change. Whether the insurance can be removed earlier, and how long it lasts, depends on the loan program. For example, the length of FHA mortgage insurance depends on the loan terms, and an upfront premium is usually financed. Check your Loan Estimate for the premium and the duration it assumes.
Loan term and loan type change the picture
- Shorter terms magnify fees. The same $3,000 of finance charges on a $300,000 loan at 6% gives an APR of 6.157% on a 15-year loan but 6.094% on a 30-year loan, because there are fewer years to spread the fees over. Only compare APRs for the same term and product.
- APR assumes you keep the loan to the end. Most borrowers do not: many sell or refinance well before 30 years. A high-fee, low-rate loan looks better on APR than it does in practice if you leave early.
- ARM APRs are incomplete. For an adjustable-rate mortgage, the APR does not reflect the loan's maximum rate, so it understates the risk. Use the caps and stress-test the payment with the ARM vs fixed calculator.
- HELOC APRs are not comparable to mortgage APRs. A closed-end loan's APR includes fees; a home equity line's APR generally does not.
Comparison mistakes that cost money
- Comparing a 15-year APR with a 30-year APR, or a fixed-rate APR with an ARM APR.
- Comparing quotes with different loan amounts, lock periods or points. Ask lenders for the same inputs.
- Choosing the lowest APR without checking cash to close. A lender credit can lower cash to close and raise the rate, and the APR may not show it.
- Treating the APR as your payment. The payment comes from the note rate.
- Ignoring how long you will keep the loan. Run the break-even before you pay points.
- Comparing an estimate to a final. An APR on a Loan Estimate can change before closing. Federal rules treat a disclosed APR as accurate if it is within 1/8 of a percentage point of the correct figure.
How to use APR well
Get at least three Loan Estimates for the same loan on the same day. Mortgage credit checks made in a short shopping window are generally treated as one inquiry, so comparing lenders should not hurt your score much. Start with the rate, points, lender credits and cash to close. Use the APR to rank loans of the same type and term. Then ask how long you expect to keep the loan and compare the total cost for that time. For the numbers, use the rate comparison calculator or the APR calculator above, and check what your lock covers in the rate lock guide.
Sources and further reading
- What is the difference between a mortgage interest rate and an APR? (CFPB)
- Loan Estimate Explainer (CFPB)
- 12 CFR 1026.22: Determination of annual percentage rate (CFPB (Regulation Z))
- Regulation Z Appendix J: Annual percentage rate computations for closed-end credit (CFPB (Regulation Z))
- Request and review multiple Loan Estimates (CFPB)
- What happens when a mortgage lender checks my credit? (CFPB)
Written by the Reaixo editorial team. Last reviewed . Educational information, not financial, legal or tax advice.
Related terms: APR, Interest Rate, Discount Points in the full glossary.