What Is APR?
Annual percentage rate, or APR, is the yearly cost of a mortgage including the interest rate plus the lender's fees, expressed as a single percentage. APR is always equal to or higher than the interest rate, and you can use it to compare two mortgage offers side by side.
APR also applies to credit cards and auto loans, but the calculation and what's included differs. This article focuses on APR for mortgages.
A note on APY: Don't confuse APR with APY, or annual percentage yield, which is what you earn on savings, not what you pay on borrowing.
The Basics
- APR is the interest rate plus lender fees; it is always equal to or higher than the rate.
- Compare APRs only across the same loan type and term, never across loan types.
- APR assumes you keep the loan to full term; selling early breaks the math.
- The rate-vs-APR gap is mostly origination fees; $0-origination lenders close it.
APR vs. Interest Rate
The interest rate and the APR measure two different things. The interest rate is the cost of borrowing the loan principal alone. APR adds the lender's fees and prepaid interest, then expresses the total as a single yearly percentage. Per the CFPB, APR is "a broader measure of the cost of borrowing money than the interest rate."
When you shop a mortgage, the lender quotes you both numbers. The rate sets your monthly payment. The APR tells you what the loan actually costs once fees are baked in.
Are APR and the Interest Rate the Same?
No, APR and the interest rate are not the same.
- The interest rate is the cost of borrowing the principal.
- APR is the interest rate plus the lender's fees, expressed yearly.
- APR is always equal to or higher than the interest rate. When a loan has zero fees, the two numbers can be identical. When a loan has heavy fees or discount points, APR pulls higher.
| Interest rate | APR | |
|---|---|---|
| What it measures | Cost of borrowing the principal | Total yearly cost including fees |
| Drives your monthly payment? | Yes | No |
| Includes origination fees? | No | Yes |
| Includes discount points? | No | Yes |
| Includes title insurance? | No | No |
| Includes prepaid interest? | No | Yes |
| Includes appraisal? | No | No |
How Is APR Calculated?
APR is calculated under federal regulation, Truth in Lending Act (TILA) and Regulation Z, not lender discretion. The formula takes the interest rate on your loan, adds the finance charges that count toward APR, and spreads them across the loan term to produce a single yearly rate.
Four inputs drive the result:
- Interest rate on the note
- Finance charges that count toward APR, which vary by lender
- Loan term, usually 30 years for fixed mortgages
- The assumption that you hold the loan to its full term
That last input is the one most readers miss. APR assumes you'll keep the mortgage for the entire term. The moment you sell or refinance early, the math behind APR breaks down. We cover that scenario below.
The size of the gap between APR and the interest rate depends on what the lender charges. Some lenders, like Opendoor Home Loans in Colorado, charge $0 in origination fees, which means the APR sits very close to the interest rate. Lenders charging thousands in origination push the APR materially higher than the rate. Two lenders quoting the same rate can produce very different APRs for that reason alone.
What APR Includes and What It Doesn't
APR includes loan origination fees and discount points. It does not include title insurance or escrow deposits, even though those costs are part of your closing costs. The reason is regulatory: TILA defines "finance charge" narrowly. Costs you would have paid even in a cash purchase, like title insurance, sit outside that definition and don't count toward APR.
The cleanest place to see the split is on your Loan Estimate. Page 3 of the Loan Estimate lists APR explicitly. Page 2 itemizes the underlying fees and makes clear which ones are "in" or "out" of the APR calculation.
Settlement Statement Items and APR Inclusion
| Settlement Statement Item | Included in APR? | Why |
|---|---|---|
| Loan Origination Fee | Yes | A lender fee for processing the loan |
| Discount Points | Yes | Treated as prepaid interest under federal rule |
| Mortgage Insurance Premium | Yes | A lender-required cost when LTV is above 80% |
| Prepaid Interest | Yes | Part of the cost of borrowing, from closing through month-end |
| Appraisal Fee | No | Paid to a third-party appraiser; would apply with any lender |
| Flood Certification | No | Paid to a third party for the property, not a lender cost |
| Title Insurance | No | Protects ownership; would apply even in an all-cash purchase |
| Attorney Fees | No | Document preparation work, not a finance charge |
| Escrow for Taxes and Insurance | No | Held in trust to pay taxes and insurance, not interest |
This split is why two loans with identical interest rates can have different APRs. If Lender A charges $0 in origination and Lender B charges $5,000, Lender B's APR runs materially higher even at the same rate. The interest rate alone hides that. APR exposes it.
When APR Doesn't Tell the Full Story
APR is a useful comparison tool when you'll keep the loan to its full term. The moment that assumption breaks, APR can mislead you. Three common scenarios:
1. You'll sell or refinance within five years. APR spreads upfront fees across the entire 30-year term. If you only keep the loan for five years, you didn't get 30 years of benefit from those fees. You paid them all up front. A lender charging $5,000 in origination might quote a lower APR but cost you more in real dollars because you didn't stay long enough to break even. This is the most common APR trap, and the companion question, how to pay less in fees up front, is covered in ways to lower your mortgage rate.
2. You're shopping an adjustable-rate mortgage. APR for an ARM uses today's rate plus a forecast of future rates. The forecast is a guess. If rates move differently than the forecast, your real cost moves with them. APR comparison across two ARMs is unreliable for this reason.
3. One offer has discount points and another doesn't. Discount points lower the rate but raise the upfront cost. APR captures both, but only if you hold the loan long enough for the lower rate to pay back the points. Buyers planning to move within a few years should compare offers using a break-even calculation, not APR alone.
A note on credit-card APR: mortgage APR works differently. Credit-card APR can compound and may include fees the cardholder pays after issuance. Mortgage APR cannot compound. It includes only fees paid at closing. The two numbers should not be directly compared.
When APR misleads, the fallback is to compare offers on total dollars paid over your actual expected hold period. The Loan Estimate has a "Total of Payments" line that helps. So does running the numbers in a calculator.
A Real-World APR Example
Today, an Opendoor Home Loans 30-year fixed mortgage is at …with an APR of …, a gap of just a few basis points. The gap is small because Opendoor Home Loans charges $0 origination, $0 discount points, and $0 in lender fees. The only finance charge in the APR is prepaid interest at closing. Other lenders charging origination fees or points will show a wider gap.
Now imagine a different lender. Same interest rate, same $400,000 home loan, same Colorado property. But this lender charges $12,000 in discount points to buy the rate down. That changes the APR significantly.
This is the situation Sarah ran into. She had two offers, both quoting her the same interest rate. One lender charged $12,000 in points; the other charged zero. The APR on the points-heavy loan looked lower on paper, which made it look like the better offer.
Sarah did the math on break-even. To recover $12,000 in points through the lower monthly payment that came with the slightly lower rate, she would need to keep the loan for around seven years. Her job was likely to move her in five.
Five isn't seven. Sarah took the loan without points. The headline APR was higher, but she kept $12,000 in her pocket, money she would have spent for benefits she'd never see.
The points-loaded offer wasn't a worse loan. It was a loan that worked for a different buyer, one staying in the home for the long haul. APR alone wouldn't have told Sarah that. The break-even calculation did.
Common Questions About Mortgage APR
Common questions about how APR works, how it differs from the interest rate, and how to use it when comparing mortgage offers.
