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Annual Percentage Rate (APR)
APR is the total yearly cost of a mortgage expressed as a percentage, including the interest rate plus lender fees and other charges. APR is always higher than the interest rate.
How It Works
The Annual Percentage Rate (APR) represents the true cost of borrowing by combining the interest rate with most lender fees into a single percentage. By law (Truth in Lending Act), lenders must disclose the APR alongside the interest rate so borrowers can compare loan offers on equal footing. APR includes the interest rate, origination fees, discount points, mortgage broker fees, and certain closing costs. It does not include title insurance, appraisal fees, or prepaid items. A loan with a 6.5% interest rate might have a 6.8% APR after fees are factored in. The bigger the gap between rate and APR, the higher the fees. APR is most useful for comparing loans you plan to keep for the full term. For shorter hold periods, focus on total costs instead.
Key Facts
APR = interest rate + lender fees, expressed as a yearly percentage
Always higher than the stated interest rate
Required by law to be disclosed on all mortgage offers
Useful for comparing loans from different lenders
Does not include all closing costs (excludes title, appraisal, prepaid items)
Most accurate for comparing loans you'll keep for the full term
Example
Lender A offers 6.5% rate with $3,000 in fees (APR: 6.65%). Lender B offers 6.375% rate with $6,000 in fees (APR: 6.62%). Despite the lower rate, Lender B's higher fees make the APR similar. If you plan to keep the loan 30 years, Lender B saves slightly more. If you'll refinance in 5 years, Lender A is better because you'll pay less in upfront fees.
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Frequently Asked Questions
APR includes lender fees (origination, points, broker fees) spread over the loan term. These additional costs make the effective annual cost higher than the base interest rate alone.
Not always. APR assumes you keep the loan for the full term. If you plan to sell or refinance within 5-7 years, a loan with a slightly higher APR but lower upfront fees may cost less overall.