Interest rate vs. APR
The interest rate is the cost of borrowing the money. The annual percentage rate (APR) adds the lender's upfront charges, such as discount points and origination or underwriting fees, and spreads them over the life of the loan. That makes APR the better number for comparing loan offers.
The calculator finds your monthly payment, subtracts the fees from the money you actually receive (or adds them to the loan), and then works out the yearly rate that matches those payments.
Points and fees
- Discount points – each point costs 1% of the loan amount and lowers your interest rate. Buying points pays off only if you keep the loan long enough.
- Origination fee – what the lender charges to process the loan.
- Not in the APR – costs such as title insurance, appraisal and escrow deposits are usually left out of a mortgage APR.
Frequently asked questions
Why is my APR higher than my interest rate?
Because the APR includes upfront lender fees. The more fees you pay, the bigger the gap.
Where do I find the APR on a mortgage offer?
It is on page 3 of the Loan Estimate, in the Comparisons section, together with the total interest percentage (TIP).
Is a lower APR always better?
For loans you will keep a long time, usually yes. If you expect to sell or refinance soon, a loan with fewer upfront fees can cost less even with a higher APR.