Rates & costs
APR vs interest rate: what's the difference on a mortgage?
Quick answer
The interest rate is the cost of borrowing the loan amount and sets your monthly principal-and-interest payment. The APR (annual percentage rate) adds lender fees, points and mortgage insurance to show the total yearly cost of the loan, so it's usually higher than the rate. Use APR to compare same-type loans you plan to keep for many years.
Every mortgage quote shows two percentages. The interest rate is what you'll see in your payment; the APR is what the loan really costs once fees are included. A lender advertising a low rate with high fees can look cheaper than it is — the APR exposes that.
Interest rate
The interest rate is the annual cost of borrowing, applied to your loan balance. It determines your monthly principal and interest payment. On a $400,000, 30-year loan at 6.5%, that payment is about $2,528.
APR
The APR spreads certain upfront costs over the life of the loan and expresses the total as a yearly rate. It typically includes:
- Discount points
- Origination and underwriting fees
- Mortgage insurance (PMI or FHA MIP)
- Prepaid interest and some other lender charges
It usually doesn't include appraisal, credit report, title insurance, recording fees or property taxes.
A real example
Two lenders quote on a $400,000, 30-year fixed loan:
| Lender A | Lender B | |
|---|---|---|
| Interest rate | 6.25% | 6.50% |
| Points and lender fees | $12,000 | $4,000 |
| Monthly P&I | $2,463 | $2,528 |
| APR | About 6.54% | About 6.60% |
Lender A has the lower APR because the $65 monthly savings outweighs the extra $8,000 in fees over 30 years. But that $8,000 takes about 10 years of savings to recover. If you're likely to sell or refinance sooner, Lender B is cheaper in practice.
When APR is misleading
- Short holding periods: APR assumes you keep the loan for the full term. Most people sell or refinance much sooner.
- ARMs: APR assumes the index stays where it is today, which won't happen.
- Different loan types or terms: comparing a 15-year to a 30-year by APR isn't meaningful.
For a fuller picture, use the "In 5 Years" figure on page 3 of the Loan Estimate.
How to compare offers
- Get Loan Estimates for the same loan type, term and lock period on the same day
- Compare rate and APR together
- Compare Section A (lender fees) directly
- Calculate the break-even on any points against how long you'll keep the loan
Frequently asked questions
Why is my APR higher than my interest rate?
Because APR adds fees, points and mortgage insurance to the interest cost. The bigger the upfront fees, the wider the gap.
Can APR be lower than the interest rate?
Rarely, but yes — when lender credits exceed the fees included in APR.
Is a lower APR always better?
Only if you keep the loan long enough. If you expect to move or refinance within a few years, a loan with lower upfront costs can be cheaper even with a higher APR.
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